ANNUAL REPORT ï 1998

Published by the Bulgarian National Bank1, Alexander Battenberg Square, 1000 SofiaTelephone: 9145/1351, 1271Telex: 24090, 24091Fax: (3592) 980 2425, 980 6493Printed in the BNB Printing Center

© Bulgarian National Bank 1999

The contents of the Annual Report of the BNB for 1998may be quoted or reproduced without further permission.Due acknowledgment is requested.

Web.site: www.bnb.bg

Honorable Chairman

of the National Assembly;

Honorable Peopleís Representatives,

Under the provisions of Article 1, paragraph 2, and Article 51 of theLaw on the Bulgarian National Bank, I have the honor of submitting theBankís 1998 Annual Report.

Svetoslav GavriiskiGovernor of the Bulgarian

National Bank

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BULGARIAN NATIONAL BANK

MANAGEMENT

MANAGING BOARD

Svetoslav Gavriiski

Governor

Martin Zaimov Roumen Avramov

Deputy Governor

Emiliya Milanova Garabed Minassian

Deputy Governor

Valentin Tsvetanov Georgi Petrov

Deputy Governor

6

Abbreviations

BGL (Lev) National Currency of the Republic of Bulgaria

BIS Bank for International Settlements, Basle, Switzerland

BISERA Banking Integrated System for Electronic Transfer

BNB Bulgarian National Bank

CB Commercial Banks

CEFTA Central European Free Trade Association

CM Council of Ministers

Comecon Council for Mutual Economic Assistance

CSB Consolidated State Budget

EBRD European Bank for Reconstruction and Development

ECU European Currency Unit

EFTA European Free Trade Association

EIB European Investment Bank

EU European Union

FESAL Financial and Enterprise Sectoral Adjustment Loan

FLIRBs Front-loaded Interest Reduction Bonds

FOB Free on Board

GDP Gross Domestic Product

GFD Gross Foreign Debt

IBID International Bank for Investment and Development

IBEC International Bank for Economic Cooperation

IIB International Investment Bank

IMF International Monetary Fund

LBNB Law on the Bulgarian National Bank

LSPDACB Law on State Protection of Deposits and Accounts with Commercial Banks

MF Ministry of Finance

NSI National Statistical Institute

OECD Organization for Economic Cooperation and Development

SBL State Budget Law

SDR Special Drawing Rights

SFRD State Fund for Reconstruction and Development

SII State Insurance Institute

SSB State Savings Bank

VAT Value Added Tax

WB World Bank (International Bank for Reconstruction and Development)

ZUNK Bulgarian Abbreviation of the Law on Settlement of Nonperforming Credits Negotiated prior to 31December 1990 (LSNC)

7

I. Developments in the World Economy and Finances

1. An Overview and Major Trends in the Development ofthe World Economy ________________________________________ 11

2. Developed Countries _______________________________________ 123. The Transition Economies __________________________________ 13

II. Developments in the Bulgarian Economy in 1998

1. Real Sector _______________________________________________ 19Gross Domestic Product _________________________________ 19GDP by Component of Final Demand _____________________ 20Prices __________________________________________________ 21Employment and Unemployment __________________________ 24

2. External Sector ____________________________________________ 26Foreign Trade __________________________________________ 26Balance of Payments _____________________________________ 31Foreign Debt and Debt Indicators _________________________ 35

3. Fiscal Sector ______________________________________________ 38Consolidated State Budget _______________________________ 38Budget Balance _________________________________________ 39Budget Financing________________________________________ 40Fiscal Reserves__________________________________________ 41Amount and Structure of Government Debt ________________ 41

4. Monetary Sector ___________________________________________ 43

III. Foreign Exchange Reserve Management and Issuing Activities

1. Structure and Management of Foreign Exchange Reserves______ 53Structure of Foreign Exchange Reserves ___________________ 54Management of Foreign Exchange Reserves ________________ 56Net Foreign Exchange Reserves and Revenue ______________ 58

2. Issuing Activity ____________________________________________ 60

IV. Financial Markets, Liquidity, and Relations

with Commercial Banks

1. The Interbank Money Market _______________________________ 652. The Government Securities Market __________________________ 663. Interest Rates on Commercial Bank Operations _______________ 664. The Forex Market and the Exchange Rate ____________________ 67

Forex Market ___________________________________________ 67Exchange Rate __________________________________________ 69

5. Commercial Bank Reserves _________________________________ 706. Payment System and Settlement _____________________________ 727. Claims on Commercial Banks _______________________________ 72

V. The Banking Sector and Banking Supervision

1. Banking Sector State, Structure and Major Trends_____________ 77

Contents

8

Change in Banking System Structure ______________________ 78Consolidated Indicators of Banking System StateBased on the Early Warning System _______________________ 81

2. Banking Supervision _______________________________________ 81Regulations _____________________________________________ 81Major Supervisory Measures Imposed by the BankingSupervision Department in 1998 __________________________ 84

3. Changes in Banking Supervision Regulations __________________ 87

VI. BNB Financial Statements

1. Annual Financial Statement _________________________________ 91Auditorsí Report to the Members of theManaging Board of the Bulgarian National Bank ___________ 93Statement of Responsibilities of the BNB Managing Board___ 94Balance Sheet of the BNB as of 31 December 1998 _________ 95Income Statement _______________________________________ 96Cash Flow Statement ____________________________________ 97Notes to the Financial Statements _________________________ 98

2. Report on the Execution of BNB Budget ____________________ 109

Appendix______________________________________________________ 111

9

I. Developments in the

World Economy and Finances

10

11

1. An Overview and Major Trends in the

Development of the World Economy

Expectations that the consequences of the financial crisis in Southeast Asiawould be localized rather than being global were not fulfilled. Global economic con-ditions deteriorated in 1998. This was a result of weaker demand in internationalmarkets, slow recovery of the Japanese economy and the other economies in theAsian region, as well as Russiaís financial crisis. World output growth slowed to2%1 in 1998 and world trade growth declined from 10% in 1997 to 3.5% in 1998.

DEVELOPMENTS IN WORLD OUTPUT AND GROWTH

(%)

Source: IMF.

The forecast for 1999 is for a slow recovery (2.2%) of the world economy butthe outcome is rather questionable because of the Brazilian financial crisis and thethreat of it spilling over to other countries in the region, subsequently adversely af-fecting the USA. The conflict in Kosovo will have negative effects on Eastern Eu-ropean countries and on Europe as a whole.

Weak demand and the faltering recovery of international energy prices arepreconditions for low inflation in global terms. In developed countries inflation willbe close to zero, and it will stay modest in developing countries and transitioneconomies. An exception to this trend is expected in countries which in 1998 andearly 1999 devalued their currencies.

Output Trade

0

1

2

3

4

5

6

7

8

9

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1990 1991 1992 1993 1994 1995 1996 1997 1998

1 IMF estimates.

12

Globally, low inflation and slow growth will keep the levels of nominal inter-est rates low. Private investorsí low confidence in emerging markets will have anegative effect on investment inflows to other countries in the group. In 1999 emerg-ing market economiesí access to private foreign financing is set to be inhibited andwill be available only at higher rates.

2. Developed Countries

Growth rates in the developed world slowed further. This is due mainly to theJapanese recession, and the slowdown in the economic cycle of European Unionmember countries. Inflation levels hover well below the average at around 1.7%.Unemployment is estimated to increase slightly. The forecast for the seven major in-dustrial countries is for a budget deficit rise to an average of 1.4% of GDP. This en-tails steady volumes of government securities issued by these countries, confrontedwith higher demand as a result of changed risk preferences among investors. Thesefactors will contribute to lower yield on government securities.

In 1998 the EU growth rate slowed to 2.4%. The Asian crisis and volatile cur-rencies in the Asian region, which is a traditional trading partner of the EU, precipi-tated reduced export volumes.

BASIC MACROECONOMIC INDICATORS

FOR EUROPEAN UNION MEMBER COUNTRIES

(%)

Source: IMF.

The major event on the European economic scene in 1998 was the introductionof the euro. On 31 December 1998 with the announcement of the exchange rate ofthe euro, the third stage of the European Monetary Union was launched. It is ex-pected that the common currency will have a positive impact on medium-termgrowth among all member countries (estimates2 range from 1.5% to 2%).

In the long run, the launch of the monetary union will boost commercial tiesbetween EU and the countries with exchange rates fixed or pegged to the euro.EMU success will depend on the implementation of consistent economic policies inaccordance with the criteria introduced by the Maastricht Treaty.

The EuropeanUnion

Real GDP Unemployment rate

Average annual inflationInterest rates

0

2

4

6

8

10

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1995 1996 1997 1998

2 According to the Austrian Institute of Economic Research.

13

Expectations for continued growth in 1999 are associated with the steadygrowth in consumption and investment within the EU. These are likely to offset theforecast decline in exports due to lower external demand. The forecast for 1999 isfor a 2% growth in GDP, 1.6% inflation and a decline in unemployment to 9.9%.The main risk stems from a worsening business climate within the Union, which mayadversely impact investment demand and hence undermine conditions for growth.

High unemployment remains a major concern among EU member countries.Its resolution is a matter of pending reforms in labor legislation aimed at improvingflexibility in workforce supply: a precondition for effective operation of the mon-etary union.

Germany. In 1998 the German economy grew by 2%,3 but the last quarterlyfigures show a certain slowdown in industrial output: the driving force during thelast two years. Other factors are a worsened business climate owing to expectationsof a heavier tax burden and lower capacity utilization due to a lack of orders, espe-cially from abroad.

Expectations for a GDP growth in 1999 reflect external factors. Inflation willstay at around 1.2%, and unemployment at around 10.9%. Major threats to achiev-ing these forecast figures are fiscal policy uncertainty and a continued depressedexternal demand.

Despite worsened global macroeconomic environment in 1998, the USeconomy experienced a 4% growth.4 It was induced by strong domestic demandboth from companies and the household sector.

Weak external demand and a lower price competitiveness of exports because ofthe appreciating dollar through most of the year account for a growing trade deficit.

Fears over higher inflation in 1998 consistent with high growth in the economywere dispelled. The consumer price index posted a growth of 1.5% in 1998 against2% in 1997. The factors for this favorable development are low raw material andenergy prices combined with an increased labor productivity.

The forecast5 for 1999 GDP is for a moderate growth within 2.5 to 3%, reten-tion of the extremely low levels of unemployment within 4.25 to 4.5%, and inflationat 2 to 2.5%. The great challenge for the American economy in 1999 will be the im-pact of the Latin American crisis and its duration.

The Japanese economy is in deep recession. According to estimates, GDPdecline in 1998 is 2.6%. Despite hopes of a faster emergence from the crisis associ-ated with a government program providing incentives to domestic demand, the ef-fect may be short-lived. Exports, the major driving force for growth in Japan, areseverely depressed due to weak external demand and the appreciation of the yenagainst the US dollar during the last quarter.

Forecasts6 for 1999 are based on skepticism about the possibilities of a dra-matic change, especially against the backdrop of structural problems in the financialsector. Consequently a slowdown in GDP decline of 0.6% may be expected.

3. The Transition Economies

Although until mid-1998 transition economies did not feel the impact of theevents of late 1997, the spread of the financial crisis and the devaluation of theRussian rouble had an extremely negative impact on growth prospects in the region.The inflow of foreign direct and portfolio investment almost halted. This is particu-

The USA

3 Deutshe Bundesbank, Monthly Report, February 1999.4 According to estimates of the Department of Commerce published in the Monetary Policy Report to theCongress Pursuant to the Full Employment and Balanced Growth Act of 1978; Board of Governors of theFederal Reserve System.5 Op. cit. 6 World Economic Outlook, December 1998, IMF.

Japan

14

-10

0

10

20

30

40

Poland

1997 1998 1997 1998 1997 1998 1997 1998

Hungary Czech Republic Bulgaria

1082

Real GDP Unemployment rate

Average annual inflationInterest rates

larly true for the countries which maintain intensive trading relationships with Rus-sia.

According to IMF forecast,7 in 1999 transition economies will experience anestimated decline of 1.9%. Central and East European countriesí overall growth isforecast at 2.2%. Major risks about this forecast are associated with the state of exter-nal demand in Russia and the European Union, which are major trading partners.

Capital outflow from this group of countries precipitated by changed investorbehavior following the Asian, and especially the Russian crisis, caused pressure ontheir exchange rates and high volatility of real interest rates. These shocks may havea negative impact on economic growth.

In 1998 Hungary achieved 5.2% economic growth driven by strong domesticdemand underpinned by a slight growth in exports. However, the countryís currentaccount deficit rose to 4.7% of GDP in 1998, combined with a 5% budget deficit ofGDP (7% if the costs of rescuing the Hungarian Post Bank are included).

Rigorous measures undertaken to decrease the ëdouble deficití contributed tothe stable operation of the present exchange rate under a crawling peg regimewithin the current limits of +/- 2.25%, thus avoiding a possible speculative attack.The forecast8 economic growth in 1999 is 5%, and a budget deficit of up to 4%. Thisforecast may be undermined by high real interest rates and further contraction ofexports consistent with unfavorable external environment.

In 1998 Poland posted a GDP growth9 of 4.8% coupled with reduced annualinflation at 11.8% and a budget deficit of 2.5% of GDP. At the same time the cur-rent account deficit accounted for 4.4% of GDP, mainly due to weaker externaldemand following the Russian crisis, and increased imports.

Forecasts10 for 1999 focus on accelerated GDP growth at 5.1%, retention ofthe current account deficit at 4.9% of GDP, annual inflation of 8.1%, and a budgetdeficit of 2.2%. Major risks for the development of the Polish economy in 1999 areassociated with reduced exports, lower industrial output and a possible monetarypolicy tightening, which will have negative implications for the projected growth rate.

MAJOR MACROECONOMIC INDICATORS FOR TRANSITION ECONOMIES

(%)

Source: IMF.

7 World Economic Outlook, October 1998, IMF.8 According to the macro framework of the national budget.9 Bank for International Settlements, Economic Indicators for Eastern Europe .10 Polish Ministry of Finance forecast.

CentralEuropeanCountries

15

In 1998 the Czech Republicís economy experienced a 2.7% decline in GDPfrom the previous year, reflecting depressed domestic demand, reinforced by thenegative trend in wholesale trade. The budget deficit accounted for 1.6% of GDP,and the current account deficit fell from 6.1% in 1997 to 1.9% in 1998. A modestimprovement of the current account was achieved thanks to the korunaís devalua-tion. Low demand and favorable conditions in the energy resources markets are themajor factors for low inflation (against currency devaluation) at 6.8%.

The forecast11 for 1999 envisages a slowdown of GDP at -0.8%, annual infla-tion of 5.8%, an increase in the current account deficit to 2.3%, and a budget defi-cit12 of 2.1%.

During the last several years the Russian economy displayed extremely volatilemacroeconomic indicators. Fiscal discipline is weak, reflecting on a continued in-crease in the budget deficit financed through fast increases in domestic and exter-nal debt. The high yield on Russian treasury bills denominated in foreign currencies,combined with modest inflation and a narrow currency band of the rouble, helpedattract considerable portfolio investments from abroad, particularly in 1997. Due todelayed privatization and restructuring processes, portfolio investments in Russiadominate the capital account of the balance of payments, which makes the main-tained exchange rate increasingly vulnerable to a possible speculative attack.

Although Russia came under pressure as early as late 1997, it managed to re-finance maturities on its liabilities, but at yet higher costs. Ultimately, the difficul-ties of the Russian government with collecting revenues to meet maturities on debtservice (cash tax revenues in 1998 fell to 7.7% of GDP) provoked a confidencecrisis among investors and an outflow of portfolio investment. The lack of an agree-ment with international financial institutions and insufficient foreign exchange re-serves of the central bank led to a widening of the roubleís fluctuation band to 9.5roubles per dollar on 17 August; after 1 September, due to unabating pressure, therouble was left to depreciate freely. This increased the debt burden whereby servic-ing of a portion of the debt was halted.

GDP13 for 1998 dropped by 4.6% reflecting reduced industrial output, a con-tracted trade surplus (due to lower export prices of major raw materials), a collapseof solvent demand due to high inflation and currency devaluation. At the same timethe budget deficit14 at the end of 1998 reached 4.8% of GDP, and inflation: 84.4%.

The outlook for the development of the Russian economy in 1999 is associatedwith recovery of industrial output and the prices of energy resources: the major itemin the countryís export list. Petroleum revenues are of key importance for the bud-get as their share accounts for 8% of total revenues.

Domestic demand will be further depressed because of high inflation, low in-comes and efforts aimed at fiscal policy tightening. Due to Russiaís sizeable exter-nal liabilities, her inability to attract capital flows, the lack of an agreement with theinternational financial institutions, and growth in monetary aggregates owing to di-rect financing of the government and low forex reserves, the exchange rate willcome under continued pressure which will have an inflationary effect and hencemay inhibit imports. The planned tax increase on goods (imposed since early 1999)will have an additional negative effect on imports of alcohol and tobacco products.

Official forecasts15 for 1999 envisage a decline in GDP within the range of 3 to5%, up to 30% annual inflation and a 2.5% budget deficit. Developments in the firstquarter of 1999 show that these targets will hardly be attained, given the higher thanexpected devaluation of the rouble and the projected unachievable level of tax rev-enues.

11 Czech Statistical Institute forecast.12 Czech Republicís Ministry of Finance forecast.13 Economic Indicators for Eastern Europe, BIS, Monetary and Economic Department, Basle, January1999.14 If revenues from privatization are taken into account in deficit financing.15 Projected in the Draft Budget of the Russian Federation.

Russia

16

In 1998 the Estonian economy posted another healthy GDP growth of 4.5% forthe third successive year. This was a little below forecasts, due to developments inRussia. Nevertheless, the negative impact of the crisis on the Estonian economy wasminimal reflecting the considerable share of Estonian trade with the EU (70%).Export growth rates exceeded those of imports thus contributing to lower trade defi-cit by almost three percentage points relative to GDP, but the current account defi-cit remains excessively high (21%). The latter was entirely offset by foreign directinvestment inflow16 directed primarily to the banking system (49%) and industry(20%). In 1998 banking sector privatization was completed; the sector is now en-tirely owned by foreign institutional investors. The great inflow of foreign direct in-vestment per capita (approximately USD 1,250) ranks Estonia top among Centraland East European countries and contributes to the countryís growing forex re-serves.

Forecasts17 for 1999 show a 4% GDP growth, 7.2% inflation and a modestbudget surplus. The low share of portfolio investment in total capital inflow demon-strates the stability of the current account deficit financing and reduces the risk forthe above forecast.

In 1998 the economy of Lithuania posted a growth of 4.4%, driven entirely byhigher domestic demand. Inflation stood low at 2.4% and foreign trade deficit roseto 19.5% of GDP. Fiscal policy was in compliance with currency board rules andbudget deficit was low at 1.3% of GDP. At the end of the year the balance of pay-ments current account ran a deficit of 12%. The predominant portion of the deficitwas offset by foreign direct investment and other investment, the remaining portionbeing offset by foreign financing.

Forecasts18 for 1999 are for a 5% growth at 3.9% average annual inflation anda budget deficit of 1.4% of GDP.

16 According to published balance of payments data (Eesti Pank, Balance of Payments).17 According to the adopted 1999 budget.18 According to the macro framework of the National Budget adopted by Parliament.

Countrieswith

CurrencyBoards

17

II. Developments in the Bulgarian

Economy in 1998

18

19

The past year was characterized by macroeconomic stabilization: a result ofthe introduction of a currency board. A policy aimed at further stabilization andtransition to sustainable economic growth resulted in a three-year standby agree-ment concluded with the IMF. Strict observance of currency board rules helped ef-fectively suppress inflation. Real salary growth enhanced individualsí purchasingpower. As a result domestic demand became an essential growth factor. Followingyears of huge budget deficits, 1998 saw a budget surplus. Tax collection improvedsignificantly while budget expenditures remained within projections. Low and stableinterest rates coupled with increased confidence in the national currency helpedstop the ëlev avoidanceí characteristic of previous years. The banking sector stayedstable with high capital adequacy values resulting from high liquidity and prudentlending policies. The external environment dramatically worsened in 1998. The fi-nancial crisis and weakened investor interest brought about a decrease in externaldemand. Price falls in major commodity groups in the countryís export list causedadditional problems, resulting in a current account deficit. Despite lower direct andportfolio investments, the current account deficit was entirely offset through thebalance of payments support extended by international financial institutions. Thishelped increase Bulgariaís forex reserves, ensuring the stability of monetary andcredit aggregates.

1. Real Sector

Gross Domestic Product

During 1998 developments in the Bulgarian economy were impacted by furtherstabilization of the monetary sector and the effects of external shocks. Economic de-velopments in 1998 suggest that financial stability is necessary but insufficient forsustainable economic growth. The fixed exchange rate and strong dependence ondevelopments in world economy indicated two divergent trends in economic growthrates.

In 199819 nominal gross domestic product reached BGL 21,577 billion. GDPincreased by 3.5% on 1997 in real terms. The first half of 1998 saw two-digit growthrates, entirely attributable to the stabilized monetary sector and the recovery of thereal sector to pre-crisis levels. During the second half of 1998 income growth wassignificantly affected by adverse developments in the world economy (the Russiancrisis and low growth rates in Europe) and political instability in the Balkans.

Final results indicate that the major factor of economic growth under the con-ditions of a currency board and a strong dependence on the state of the worldeconomy, is rapid response by the real sector to external shocks. Due to the impos-sibility of offsetting the adverse effects of international markets through monetarymeasures, the reaction of the economy depends entirely on real sector and labormarket flexibility.

19 NSI preliminary data.

20

1997 1998

Agriculture andforestry(21.1%)

Industry(28.7%)

Services(50.2%)

Services(45.2%)

Industry(28.2%)

Agriculture andforestry(26.6%)

SectoralStructure of

GDP

GDP by Component of Final Demand

The share of consumer spending, the major component of final demand, roseto 88% in 1998 from 74% in 1997. Monetary stabilization and steady inflationaryexpectations among consumers helped recover householdsí real incomes. As a resultfinal consumption grew by 22.7% and 6.5% in the first and second quarters respec-tively compared with last yearís corresponding quarters. Household consumptiongrowth rates in the first half of the year stood stable, though high, reflecting less un-certainty in the economy and real incomes growth. As the positive stabilization ef-fects depleted in the first half of the year growth rates in the second half sloweddown. Overall 1998 consumer spending grew by 7.6% compared with 1997.

Final government spending also rose considerably (by 7.1%) consistent withbudget stabilization reflecting improved tax discipline and a reduced share of inter-est payments in current expenses.

Gross investment reached BGL 3,181 billion in 1998, accounting for 14.7% ofdomestic demand. Gross fixed capital formation comprised 11.6% of gross addedvalue, an increase of 16.4% in real terms compared with the previous year.

Net exports turned negative in 1998 and accounted for 1.1% of GDP. Exportsof goods and services totaled BGL 9,755 billion, or 45.2% of GDP, and imports ofgoods and services amounted to BGL 9,983 billion, or 46.3% of GDP. Imports ofgoods and services decreased by 2% in real terms on 1997, and exports: by 15.6%.

Financial stabilization, a result of the introduction of a currency board in thecountry, contributed to the real increase in the added value in all economic sectors.Gross added value in industrial sector totaled BGL 5,508 billion, an increase of4.3% in real terms on 1997. Added value in agriculture and forestry also grew inreal terms, by 1.4%, reaching BGL 4,045 billion. Services rose by 0.5% in realterms, to BGL 9,649 billion. The slowdown in growth rates on the previous year ismainly due to the large share of this component in gross added value.

GDP structure by economic sector experienced dramatic changes: the share ofagriculture and forestry decreased by 5.5 percentage points and the share of industryincreased by 0.5 percentage points. The higher price growth of nontradable goods un-der a currency board encouraged enhanced supply of these goods and services. Thisreflects the increased share of added value in services: 50.2% against 45.2% in 1997.

SECTORAL STRUCTURE OF GDP

(gross added value at current prices)

Source: NSI.

21

GDP by Originof Ownership

Preliminary 1998 data indicates that added value in the private sector consid-erably exceeded added value created in the public sector. At current prices privatesector gross added value amounted to BGL 12,241 billion, or 63.7% of whole-economy gross added value. The private sector in agriculture and forestry accountedfor the largest share: 98.2%. The sizable share of agriculture and forestry (21.1%)is related to the inclusion of smallholdings and garage industries in the methodologyof reporting for added value in agriculture.

The private sector insignificant growth rates in industry (0.5 percentage points)reflect slow privatization to a great extent. This pertains to foreign investorsí slug-gish interest in the ongoing privatization in Bulgaria due to volatile world economyand the effect of the Russian crisis on investorsí interest in Bulgaria.

PRIVATE SECTOR SHARE IN GROSS ADDED VALUE BY SECTOR

(%)

1994 1995 1996 1997 1998

Private sector, total 41.6 48.3 51.9 58.8 63.7incl.: Agriculture and forestry 10.2 11.1 9.5 22.7 20.7 Industry 7.1 9.4 9.1 11.2 12.7 Services 24.3 27.8 33.2 24.9 30.4

Source: NSI.

Prices

1998 saw the lowest inflation rates since the start of economic reform. Thisconfirms the view that the currency board has effectively repressed sources of infla-tion in the economy. Inflationary expectations were entirely connected with supplyshocks due to an increased number of government regulated prices and the intro-duction of VAT for some goods which were previously exempt from it.

Price developments in 1998 confirm the rule that, the major source of inflationunder a fixed exchange rate are nontradable goods, among which most significantare services (in 1998 services prices rose by 22.2%, and those in catering establish-ments: by 10.3%).

Of all transition years, 1998 had the lowest inflation. Inflation measured by theconsumer price index was just 1%. Price dynamics clearly indicate three trends.First, a sustained price stabilization around a constant level: a result of constraintsimposed by currency board rules. Second, the strong impact of international pricesand demand (internal and external) on prices of tradable goods and services in thecountry. Third, the short-term effect on overall price levels of prices administrativelyset by the government.

ConsumerPrices

22

20 The decrease in domestic credit was entirely due to the decrease of more than BGL 1 trillion (69%)in claims on the government, while credit to real sector increased by 6.3%.

-3

-2

-1

0

1

2

3

4

0

50

100

150

200

250

300

350

400

450

Monthly(left scale)

Corresponding monthof previous year(right scale)

I II III IV V VI VII VIII IX X XI XII

CONSUMER PRICE DYNAMICS IN 1998

(%)

Source: NSI.

The first trend of continuous repression of inflationary sources in the economywas a result of the fixed exchange rate associated with the introduction of a newmonetary regime in the country. Money supply growth entirely reflected balance ofpayments developments and the behavior of individuals and companies. Lack ofsizable capital flows into Bulgaria due to worsened international financial marketsadded to the low growth rate of money supply. The 9.6% nominal money supplygrowth and decelerated currency circulation created monetary impulses for thehigher price level. Money demand growth attributable to monetary stabilization andincreased real incomes additionally helped neutralize inflationary impulses causedby particular monetary factors. These were the reasons behind low inflation ratesduring 1998.

Decreased domestic credit in the economy was the other major monetary fac-tor behind low inflation rates. An 18% fall in credit20 led to low internal demandand repressed inflationary impulses in the economy caused by shocks in aggregatedemand.

Decreased internal and external demand in the economy and internationalprice effects appeared to be the second major reason behind the low inflation rate.Low internal demand, reflecting sluggish lending activity and low incomes, limitedprice growth. Slow growth rates in the world economy also contributed to the lowdemand and played the role of an anti-inflationary factor. International demand hadthe most significant effect on tradable goods. The tradable goods group faces thestrongest competition from foreign producers, since nonfoods account for the big-gest weight in it. This reflects the small relative price growth, particularly after thestabilization of the exchange rate. Compared with 1997 food prices decreased by4.8% and nonfood prices by 0.1%. Prices of services increased by 22.2% and theseof public catering by 10.3%. Changes in food prices played a key role in consumerprice dynamics since foods comprise a significant share (55%) of the consumerprice index.

Price falls of raw materials in international markets due to slower growth inthe world economy had an additional favorable effect on inflation.

23

PRODUCER PRICE INDICES BY COMMODITY GROUP IN 1998

(December 1997 = 100)

Source: NSI.

The 1998 inflation rate also suggests that the increase in government regulatedprices has an immediate effect on the price index. This is due to the strong sensitiv-ity of public inflationary expectations for changes in government regulated pricesand services. Highs in the inflation rate in 1998 were reported in the months whengovernment regulated prices increased. At the same time, the previous yearís expe-rience indicates that inflationary impulses caused by increases in administratedprices had a short-term effect due to the immediate absorption of these impulseswithin the inflationary expectations of the public and companies, and the lack ofmonetary sources of inflation to multiply inflationary expectations.

In 1998 monthly producer price index moved close to the level of consumerprice index. Producer price index for 1998 is 101.01: almost matching the annualconsumer price index.

In the months with increased government regulated prices the consumer priceindex grew faster than the producer price index. This was also typical of previousyears but what was specific to 1998 was that producer prices increased faster in themonths prior to any changes in administrated prices. These developments signal anew corporate strategy in price formation, atypical of recent years when the pro-ducer price index followed the growth in consumer prices with a certain lag.

Major factors responsible for the movements in industrial producer prices are:USD/BGL exchange rate changes, prices in international markets, internal and ex-ternal demand. Sluggish external demand due to slower international economicgrowth did not cause significant changes in the producer price index. Exchange ratemovements reflected both on producer prices through production costs (raw mate-rials and energy) and incomes from sale of output abroad. Price falls of major rawmaterials helped decrease companiesí production costs. At the same time this im-peded the increase in producer prices of companies producing goods tradable ininternational markets. These were the two major factors responsible to a great ex-tent for the slow growth rate of the producer price index.

Food

NonfoodServices

Total

I II III IV V VI VII VIII IX X XI XII

95

100

105

110

115

120

125

ProducerPrice Index

24

PRODUCER PRICE DYNAMICS IN 1998

(%)

Source: NSI.

Employment and Unemployment

The monetary stabilization started in mid-1997 and maintained over 1998 im-pacted economic activity in the country and employment. The recovery in output,associated with the stabilization effect of the currency board, brought about changesin employment. The private sector was more strongly impacted by the positive de-velopments.

Preliminary data21 for 1998 indicates that mean annual employment grew by51,000 (1.6%) compared with 1997. At the same time, restructuring of employmentcontinued.

The number of public sector redundancies is less than the increase in the num-ber of private sector employees. It would be true to assume that there was an in-crease in the labor force with the bulk of it shifting to the private sector. A portionof unregistered unemployed, farmers, and the self-employed entered this sector. Asin the previous year the share of private sector employment continued to increase atthe expense of public sector employment.

Public sector employment fell by 9%; public sector employees in 1998 num-bered 1,284,900 against 1,412,000 in 1997. This reduction reflects enhanced restruc-turing of the real sector and the closure of a number of jobs in the public sector. Agreat number of public enterprises shifted to the private sector and consequently thenumber of public sector employees fell. This was coupled with a process of struc-tural reforms in public institutions and a concurrent reduction in jobs.

I II III IV V VI VII VIII IX X XI XII

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0

50

100

150

200

250

300

350

Monthly(left scale)

Corresponding monthof previous year(right scale)

21 NSI data does not include information on farmers and self-employed.

Employment

25

EMPLOYMENT BY SECTOR

Source: NSI.

According to National Labor Office data, in 1998 the number of registered un-employed at labor offices totaled 465,200 or 12.8% of the labor force. Two periodscharacterized by divergent trends can be distinguished in unemployment in 1998.

UNEMPLOYMENT IN 1998

Source: National Labor Office.

The first period (January to September) is characterized by continuous unem-ployment decline in absolute terms; the share of the unemployed in total labor forcedecreased by 133,000 or 3.5%. This reflects the recovery in output in the first halfof 1998. Slower income growth during the third quarter was greatly offset by sea-sonal factors which helped sustain the downward trend in unemployment.

The second period (October to December) is characterized by an increase inunemployment. However, by year-end unemployment was lower than in 1997. There

1997 1998

Agriculture (25.7%)

Industry (30.8%)

Services 43.5%)(Services (42.7%)

Industry (32%)

Agriculture 25.3%)(

Unemployment

0

100

200

300

400

500

600

0

5

10

15

20

Th

ou

sa

nd

s o

f p

erson

s

%

Unemployed(left scale)

Unemployment rate(right scale)

I II III IV V VI VII VIII IX X XI XII

26

are two major factors responsible for the reversal. First, the government initiatedreal closure of loss-making industrial enterprises. Second, unemployment was seri-ously affected by the sluggish external demand which prompted a decline in outputand employment in export-oriented industries. The impact of the Russian crisisshould be also noted, though it had an indirect effect: international trade conditionsdeteriorated and foreign investorsí pessimism increased which additionally worsenedBulgariaís export opportunities, prompting increases in unemployment.

2. External Sector

Foreign Trade

In 1998 Bulgariaís foreign trade developed under the conditions of continu-ously falling demand, a result of the Asian and Russian financial crises. Prices ofmajor goods from Bulgariaís export list continued to fall in international markets.Internal demand was volatile, tending to decline.22

The trade balance in 1998 showed a deficit (USD 315.6 million), a decrease ofUSD 700 million compared with 1997.

Exports (FOB) decreased by 13% due mostly to unfavorable external condi-tions and the worsened competitiveness of Bulgariaís exports: a result of the slowpace of structural reform and de facto lev appreciation to some extent.

Imports (FOB) increased slightly (by 1%) showing a sustainable downwardtrend in the second half of 1998.23 Despite slower growth rates during the last fivemonths of the year, imports of nonenergy goods significantly increased (14.5%)compared with same period of 1997. Such an increase is typical of countries withfixed exchange rates. It may be assumed that credit to the nongovernment sector,though insignificant, contributed to imports of nonenergy goods.

FOREIGN TRADE DYNAMICS

(billion USD)

Source: MF Computing Center and NSI.

22 The overall decline in sales of industrial enterprises in 1998 was 9.4% compared with 1997. (Source:NSI). In 1998 retail sales to individuals rose by 5.1% on 1997.23 Between January and March 1998 imports grew by 24.9% (USD 219.7 million), while in the last fivemonths of the year a decrease of 9.5% (USD 200.6 million) was reported.

Exports (FOB) Imports (FOB)

3.5

4.0

4.5

5.0

5.5

1996 1997 1998

27

24 Following the privatization of MDK Pirdop by the Belgian Union Miniere (October 1997), the plantexports mostly unrefined copper requiring less processing and having a lower price than refined copperwhich had been exported prior to privatization.

In 1998 prices of raw material feedstocks were falling faster than industrialoutput. Data suggests that the significant decline in revenue from exports during1998 is attributable to the big share of exported raw material feedstocks and energyresources requiring insignificant processing (57% of total exports in 1997 against53% in 1998). Export revenue from raw materials and energy resources declined by19%. These products contributed most significantly (10.8 percentage points) to theoverall decline in exports: 13%.

Commodity price falls in international markets started in 1997 (as a result ofthe South-Asian financial crisis) affected both developed economies and emergingmarkets, including Bulgaria. The adverse effect of the Asian crisis was dramaticallysharpened by the Russian economic and financial collapse. Prices of most goodsreflect low demand, excess supply and accumulation of commodity stocks. In late1998 prices relatively stabilized showing slower rates of decline.

PRICES IN INTERNATIONAL COMMODITY MARKETS IN 1998

Average prices Change(USD/ton) (%)

1997 1998 1998/1997

Cereals 159.5 126.1 -20.9Cotton 1748.0 1445.0 -17.3Wool 4303.0 3363.0 -21.8Carbamide 146.1 121.2 -17.0Triple superphosphate 171.9 173.1 0.7Aluminum 1605.6 1367.3 -14.8Copper 2276.8 1654.1 -27.3Lead 624.2 528.6 -15.3Zink 1316.0 1025.0 -22.1Hot rolled steel 337.3 279.2 -17.2Cold rolled steel 448.2 370.8 -17.3Steel products* 89.1 74.9 -15.9Crude oil** 18.1 12.1 -33.1

* Index 1990 = 100.** Brent, USD per barrel.

Source: Commodity price data. The World Bank.

Exports of chemicals, plastics and rubber experienced the most significantdrop: 30%. Within this commodity group exports of fertilizers and organic chemicalproducts fell most dramatically: by 53.5% and 44% respectively.

The price slump of petroleum is the major reason behind the fall of 32.5% inexports of the mineral products and fuels aggregate commodity group.

Exports of base metals and their products, which had the biggest share in 1997export revenues (21.3%), markedly declined in 1998: by approximately 20%. Cast-iron, iron and steel, and copper and its products groups contributed most signifi-cantly to this decline (18.3% and 27% respectively). Export falls were attributableto external factors (a drop in demand and increase in general supply of steel in in-ternational markets prompting additional price falls) as well as internal factors (fi-nancial problems in Kremikovtzi AD and Stomana). Export decrease in the copperand its products group reflects both lower prices and changes in the exported rangeof products.24

Despite a 6% decline in exports of consumer goods in 1998, these goods ac-counted for one-third in total exports. The increased volume and share of consumergoods are attributable to higher exports in the textile, leather materials, clothing,footwear and other consumer goods group (8%). Major reasons behind this growthare: intensive privatization of enterprises in this branch and low labor costs resultingin increased orders for clothing and footwear made with client-supplied materials.

Exports

28

EXPORT DYNAMICS

Relative share Contribution to total export change Exports (percentage points)

(by use) 1997 1998 1997 1998 (%) (%) Total I quarter II quarter III quarter IV quarter Total

Consumer goods 28.2 30.5 -0.8 -1.4 0.6 -4.7 -1.2 -1.7Raw and other materials 49.2 47.0 1.0 -4.7 -5.3 -10.6 -12.6 -8.4Investment goods 14.7 16.2 -0.6 -0.5 -0.9 -1.8 0.7 -0.7Energy resources 7.9 6.3 1.3 -0.8 -4.1 -2.2 -2.5 -2.4

EXPORTS, TOTAL (FOB) 100.0 100.0 1.0 -7.4 -9.8 -19.2 -15.6 -13.1

Source: MF Computing Center and NSI.

The smaller decline in exports of investment goods (4%) reflects slower fallsin prices of industrial goods than those of raw material feedstocks and energy re-sources.

Weakened competitiveness is the other reason for the decline in 1998 exports.This is attributable to increased unit labor costs and higher electricity costs ratherthan to the real overvaluation of the lev following the introduction of the currencyboard. The increase in unit labor costs is indirectly proved by the difference ingrowth rates of real salaries and revenues from sale of industrial output25. This,combined with the unfavorable situation and ineffective export structure, signal theneed for structural reform aimed at increasing profitability and sustaining exportcompetitiveness.

INDICES OF REAL EFFECTIVE EXCHANGE RATE

(December 1994 = 100)

* Based on countriesí weight in exports (Italy ≠ 23%, Russia ≠ 22%, Germany ≠ 21%, Turkey ≠ 18%, Greece ≠ 16%).** Based on countriesí weight in settlements (calculated using a basket of three currencies: USA ≠ 75%, Germany ≠ 20%, Swit-

zerland ≠ 5%).

Source: BNB, NSI and International Financial Statistics.

Expectations for a rapid import growth, typical of countries with a fixed ex-change rate, fell short. Major factors behind the slow import growth are: price falls(particularly of petroleum), sluggish external demand for Bulgarian exports (as ex-

25 In 1998 revenue from sale of industrial output dropped by 9.4% and the real salary increased by 10.8%compared with 1997.

Ií96 III VI IX XII Ií97 III VI IX XII Ií98 III VI IX XII40

50

60

70

80

90

100

110

120

130

140

150

160

Index of the real effectiveexchange rate(consumer price index)**

Index of the real effectiveexchange rate(consumer price index)*

Imports

29

ports have significant import components), and a volatile and low internal demand.Price conditions prompted import restructuring, with imports of nonenergy goodsincreasing at a fast pace: by 14.5%. During the first quarter of 1998 imports ofnonenergy goods dramatically increased (by 41.7% compared with the crisis lowreported in the first quarter of 1997), while the significant effect of the above fac-tors coupled with higher base levels resulted in slower growth rates in the remain-ing months of 1998.

In terms of structure by use, imports of consumer goods increased both byvolume (42%) and share (four percentage points). This growth reflects decreasedoutput and sale of Bulgarian consumer goods (particularly industrial ones), a resultof foreign trade liberalization and trade agreements concluded and Bulgariaís asso-ciation to CEFTA. The growth in real salary and consumer loans also contributedto increased imports of consumer goods.

IMPORT DYNAMICS

Relative share Contribution to total import change Imports (percentage points)

(by use) 1997 1998 1997 1998 (%) (%) Total I quarter II quarter III quarter IV quarter Total

Consumer goods 10.4 14.6 0.5 8.5 4.5 2.6 3.0 4.4Raw and other materials 40.2 40.9 1.8 8.4 1.7 0.5 -3.4 1.2Investment goods 17.4 21.4 -1.2 9.5 4.8 2.3 2.2 4.3Energy resources 31.9 23.0 -4.0 -0.4 -11.2 -9.1 -11.3 -8.6

IMPORTS, TOTAL (CIF) 100.0 100.0 -2.8 26.0 -0.1 -3.7 -9.5 1.3

Source: MF Computing Center and NSI.

Imports of raw material feedstocks rose by 3%, while imported investmentgoods increased much faster: by 24.8%. Sizable percentage increases reflect the lowcomparative base and disturbed import structure, a result of previous yearsí crises.Imports of vehicles increased most significantly in the group of investment goods(90.3%), reflecting lifted duties on car imports from the EU and the countryís gen-eral economic stabilization. The electrical machines group showed a 39.2% growthdue mostly to investment in privatized enterprises, also contributing significantly tothe increase in imports of investment goods.

Imports of mineral fuels, mineral oils and distilled products decreased mostdramatically in energy resources (27.4%). Declines in imports of gas (34.2%, USD165.1 million) and crude oils (34.1%, USD 263.2 million) contributed most mark-edly to this drop. The decrease in volume of natural gas reflects smaller industrialconsumption, associated with reducing and closing of loss-making enterprises whichuse natural gas as an energy resource and input, and the sizeable indebtedness of anumber of enterprises to Bulgargaz AD.

The high share of Bulgariaís exports in GDP and increased share of exports tothe EU (from 43.2% in 1997 to 49.7% in 1998) indicate a growing dependence ofexport and GDP growth rates on EU growth. In the fourth quarter of 1998 the Rus-sian crisis had a significant impact on EU member countries, prompting a decreaseboth in external and internal orders and a decline in imports from other countries.In the countries of the Eurozone GDP growth declined from 2.5% in the secondquarter of 1998 to 0.5% in the fourth quarter of 1998. This is one of the factorsbehind the decline in Bulgariaís exports to these countries for the same period.

GeographicStructure

30

GEOGRAPHIC STRUCTURE OF EXPORTS

Source: MF Computing Center, NSI and BNB.

Exports to the former USSR countries declined both by volume (38.3%) andshare (5.2 percentage points), prompting more than a 50% decrease in overall ex-ports. Exports to Russia were affected most significantly, falling by 40.4%. This re-flects high import duties imposed on Bulgarian goods, the severe economic and fi-nancial crisis in Russia, and Bulgarian exportsí insufficient competitiveness in Rus-sian markets, caused by the real appreciation of the lev against the rouble. Exportsto Russia between September and December 1998 (following the decision to de-value the rouble and the announcement of the moratorium on domestic debt pay-ment) fell by two-thirds, accounting for 60% of the 1998 decline. Exports of veg-etable and fruit products dropped most dramatically (55.6%) followed by pharma-ceuticals (41.6%). The share of Russian markets in total Bulgariaís export volumesharply decreased, reaching 5.5%.

In 1998 the share of exports to other OECD countries also declined (22.6%),resulting in a reduced share of this group in total exports. The economic collapseand reduced internal demand in the countries of Southeast Asia26 prompted a dra-matic drop to these countries: 68.4%.

Only Bulgariaís exports to CEFTA countries indicated a growth (by 50.9%),with the biggest increase in exports being to Poland (86.6%) and Slovenia (105.6%).

Imports from the EU increased in 1998 (20.8%), particularly those from Ger-many, Greece and France. As a result the share of imports from the EuropeanUnion reached 45% against 37.7% in 1997. Imports from Germany rose by 18.3%due mainly to imported investment goods, while imports from Greece grew by42.1% primarily at the expense of imported mineral fuels and oils. The latter importgrowth reflects the delayed reaction of Neftochim to price falls of petroleum in in-ternational markets.

26 Including Korea, Malaysia, Thailand, the Philippines and Indonesia.

1997 1998

EU(43.2%)

Other countries(15.8%)

Other countries(14.4%)

EFTA(0.9%)

Other OECDcountries

(12%)Other OECDcountries(13.5%)

Balkancountries

(5.9%)

CEFTA(2.8%)

Former USSRcountries(17.9%)

Former USSRcountries(12.7%)

CEFTA(4.9%)

Balkancountries

(5.5%)

EFTA(0.8%)

EU(49.7%)

31

GEOGRAPHIC STRUCTURE OF IMPORTS

Source: MF Computing Center, NSI and BNB.

Imports from Russia dropped dramatically: by 27.4% (USD 379 million). Im-ports of mineral fuels and oils declined most significantly (35.3%), a result of thedrop in prices of crude oil and oil products, the reduced general consumption ofnatural gas, and increased imports of crude oil and oil products from other coun-tries (Germany and Romania). Reduced imports led to a decrease in the Russiaísimport share in total imports: from 28% in 1997 to 20.1% in 1998.

Given the dramatically devalued currencies of the Southeast Asian countriesand the enhanced competitiveness due to lower unit labor costs, imports from thesecountries grew significantly: by 94.6%.

Balance of Payments

Developments in the 1998 balance of payments reflected unfavorable externalconditions and enhanced support by international financial institutions to economicreform in Bulgaria.

The balance of payments current account was seriously impacted by the tradedeficit balance ending in deficit of USD 251.1 million (2% of GDP).

Trade Balance. According to preliminary data the 1998 trade balance reporteda deficit of USD -315.6 million, a decrease of USD 696 million compared with 1997.

CurrentAccount

1997 1998

EU(37.7%) Other countries

(14%)

Other countries(13%)

EFTA(1.8%)

Other OECDcountries

(8.1%)

Other OECDcountries

(7.1%)

Balkancountries

(1.9%)

CEFTA(4.6%)

Former USSRcountries(32.9%)

Former USSRcountries

(25%)

CEFTA(5.6%)

Balkancountries

(1.6%)EFTA(1.6%)

EU(45%)

32

CURRENT ACCOUNT AND TRADE BALANCE

(million USD)

Source: NSI and BNB.

Exports (FOB) declined by 13.1%, reaching USD 4,293 million, a decrease ofUSD 647 million compared with 1997. Major reasons behind this decrease are: dra-matic price falls of major goods and raw materials in international markets, lowerexternal demand, reduced competitiveness of Bulgarian exports, due mainly to slowpace of economic reform started in 1991. Imports (FOB) totaled USD 4,608.6 mil-lion, indicating an increase of 1.1% (USD 49.3 million) on 1997.

Services. The balance on services ended in surplus (USD 147.9 million)though it worsened by USD 18.4 million (11.1%) from 1997. This is attributable tolower net revenue from transportation and other services. Net revenue from transpor-tation services is negative (USD 71 million), a decrease of 14.2 million. Travel rev-enue increased (18.5%) and expenditure remained unchanged. As a result net rev-enue from travel reached USD 215.8 million against USD 147.4 million a year ago.

Income. In 1998 the balance on the Income27 item improved (by USD 43.4million, or 12.2%) from 1997. This is mainly a result of increased forex reserves ofcommercial banks and the BNB which helped increase revenue on the Income itemto USD 276 million against USD 210.6 million in 1997. At the same time paymentson this item also increased: USD 589.5 million against USD 567.5 million a yearago. This is due mainly to an improved methodology of reporting direct investment.Net interest revenue indicated a deficit (USD 313.5 million) though it improvedfrom 1997. Sizeable net interest payments on Other investment predetermined thechange in net revenue and this is most clearly pronounced in interest payments onBulgarian Brady bonds in January and July.

Current Transfers. Net revenue from current transfers in 1998 totaledUSD 230.1 million against USD 236.8 million in 1997.

27 The structure of the Income item includes revenue from direct investment, portfolio investment, otherinvestment (loans) and employment emoluments.

1997 1998

Exports (FOB)

Imports (FOB)

Trade balance

Current account

-500

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

33

MAJOR CURRENT ACCOUNT COMPONENTS

(million USD)

1997 1998

Current account 426.7 -251.1Goods: credit (FOB) 4,939.7 4,293.0Goods: debit (FOB) -4,559.3 -4,608.6Trade balance 380.4 -315.6Services: credit 1,337.5 1,255.0 Transportation 448.9 448.4 Travel 369.0 437.2 Other services 519.6 369.4Services: debit -1,171.2 -1,107.1 Transportation -505.7 -519.4 Travel -221.6 -221.4 Other services -443.9 -366.3Goods and nonfactor services, net 546.7 -167.7Income: credit 210.6 276.0Income: debit -567.5 -589.5Income, net -356.8 -313.5Current transfers, net 236.8 230.1

Source: NSI and BNB.

In 1998 the balance on the financial account was positive (USD 218.6 million),a decrease of USD 380.1 million (63.5%) from a year earlier. This is primarily at-tributable to lower direct investment, decreased portfolio investment of nonresi-dents, and an increase in principal payments on the countryís foreign debt.

MAJOR FINANCIAL ACCOUNT COMPONENTS

(million USD)

1997 1998

Direct investment, net 503.1 401.2 in reporting country 504.8 401.3 abroad 1.7 0.1Portfolio investment, net 160.0 -219.4 in reporting country 146.4 -112.0 abroad -13.6 -107.4Other investment, net -40.8 36.6 assets -54.0 252.6 liabilities 13.2 -216.0BNB foreign exchange reserves -1,640.1 -574.1

Source: BNB.

Direct Investment. Direct investment28 in Bulgaria during 1998 totaledUSD 401.3 million, a decrease of USD 103.5 million (20.5%) compared with 1997(USD 504.8 million).

Portfolio Investment. In 1998 portfolio investment of residents abroad signifi-cantly increased: by USD 107.4 million, against USD 13.6 million in 1997. Portfolioinvestment in the reporting country in 1998 decreased by USD 112 million, while in1997 portfolio investment grew by USD 146.4 million. Significantly reduced invest-ment of nonresidents in government securities reflects dramatically narrowed inter-est rate differential between the lev and the Deutschemark. The Russian crisis andthe concurrent withdrawal of foreign investors from emerging markets also contrib-uted to the decrease in portfolio investment in the country in the third quarter. Aftergovernment securities and ZUNK bonds had fallen due, foreign investors did notbuy new debt securities.

Decreased interest of foreign investors in Bulgarian government securitiessince early 1998 was partially offset by investment of USD 19.3 million in Bulgarianenterprises through the stock exchange.

28 Data for 1998 is preliminary. The method of reporting direct foreign investment by the BulgarianNational Bank is described in the BNB Monthly Bulletin, issue 3 of 1999, Methodological Notes.

FinancialAccount

34

Reservesand OtherFinancing

Reduced portfolio investment in government securities and bonds issued underZUNK on the one hand, and increased BNB forex reserves on the other handprompted an improvement in the ratio of the nominal value of government securitiesand bonds issued under ZUNK, held by nonresidents to BNB forex reserves. The im-proved ratio helped strengthen the balance of payments stability. The ratio de-creased from 9.9% by the end of December 1997 to 2.6% by the end of 1998.

PRICES OF BULGARIAN BRADY BONDS IN 1998

(cents for USD 1 nominal value)

Source: Reuters.

Other Investment. In 1998 Bulgariaís assets abroad (other investment: assets)declined by USD 252.6 million. Claims on previously extended loans to other coun-tries increased by USD 2.6 million (net) due mainly to interest accrued on theseloans. Commercial banksí deposits abroad decreased by USD 69.4 million and to-tal commercial banksí assets abroad (deposits and portfolio investment) grew byUSD 38 million. During 1998 foreign currency deposits of individuals and privatecompanies with resident banks increased by USD 155.2 million, reflecting an ad-equate decrease of their foreign assets.

Bulgariaís obligations (other investment: liabilities) in 1998 decreased byUSD 216 million. Loans extended to Bulgaria by nonresidents (loans on the balanceof payments support excluded) declined by USD 145.8 million (net). This decreaseis attributable to a great extent to renegotiation of Bulgariaís debts of USD 192.8million (DEM 344.8 million) to the former GDR (including clearing agreements)within the former Comecon.29 In 1998 deposits of nonresidents with Bulgarian com-mercial banks fell by USD 79.5 million, reflecting conversion of the deposit of theNational Bank of Poland into a long-term debt in October 1998.

BNB Forex Reserves. Between January and December 1998 BNB forex re-serves grew by USD 574.1 million. In 1997 this growth was USD 1,640.1 million.The lower growth of BNB forex reserves compared with 1997 was a result of theworsened current account.

Use of IMF credits. In 1998 IMF net financing totaled USD 129.2 million,

29 According to the IMF 5th edition of the Balance of Payments Manual (1993) the amount of renegoti-ated Bulgariaís obligations to the former GDR, worth USD 192.8 million (DEM 344.8 million) are re-ported on the debit side of the item Other Investment ≠ Liabilities/Loans and on the credit side of theitem Exceptional Financing/Rescheduled Obligations.

I II III IV V VI VII VIII IX X XI XII

30

40

50

60

70

80

90

DISCs FLIRBs IABs

35

30 Transactions prompting changes in the amount of gross foreign debt include principal repayment, re-ceipt of new loans and restructuring of previously extended loans.

Amount andStructure of

GrossForeign Debt

including the last tranches of USD 166 million extended in May on the fifth standbyagreement and the tranches disbursed in October and November, worth USD 145.8million, under the extended IMF agreement with Bulgaria.

Exceptional Financing. In 1998 loans in support of Bulgariaís balance of pay-ments (IMF loans excluded) increased by USD 239.1 million (net). This increase re-flected primarily the World Bankís FESAL extended in March, in the amount ofUSD 100 million, and EU loans in support of the balance of payments, worthUSD 282.9 million (the net growth of these loans totaled USD 121.3 million).

The overall balance for 1998 ran a surplus of USD 36 million, againstUSD 1,283.3 million in 1997.

Foreign Debt and Debt Indicators

According to preliminary data, Bulgariaís gross foreign debt (GFD) by end-De-cember 1998 totaled USD 10,101.2 million, an increase of USD 424.6 million (4.4%)compared with end-1997. This increase reflects the transactions30 of USD 230.8 mil-lion, as well as valuation adjustments in the amount of USD 194.3 million (45.8% ofthe total increase).

MATURITY STRUCTURE OF GROSS FOREIGN DEBT

Indicators 1997 1998

million USD % of GFD million USD % of GFD

Long-term foreign debt 8,560.5 88.5 9,263.8 91.7Short-term foreign debt 1,116.1 11.5 837.4 8.3Gross foreign debt 9,676.6 100.0 10,101.2 100.0

Source: BNB.

In 1998 Bulgariaís long-term foreign debt rose by USD 703.4 million (8.2%).This growth is attributable to the transactions of USD 539.4 million and valuationadjustments in the amount of USD 164 million (23.3% of the total increase). Com-pared with December 1997 short-term obligations decreased by USD 278.7 million(25%), due primarily to transactions made in the amount of USD 309 million. Thechange in exchange rates prompted an increase in short-term obligations byUSD 30.3 million. Major reasons behind the decrease in short-term obligations are:the restructuring of overdue loans to the former GDR in April, and the conversionof debts to the National Bank of Poland into a long-term debt in October 1998. Inaddition, Bulgariaís obligations to the International Bank for Economic Cooperationwere finally settled in December 1998.

By 31 December 1998 Bulgariaís long-term obligations to official creditors to-taled USD 4,043.4 million, an increase of USD 771.7 million (23.6%) from end-1997. The countryís debt to the IMF grew by USD 178.2 million (19%) and to theWorld Bank by USD 171.2 million (31.7%). Obligations to official Paris Club credi-tors also rose (by USD 166.7 million, 19%), due primarily to the rescheduled debtto the former GDR. The increase in long-term obligations to official creditors re-flects also the conversion of Bulgariaís debt to the National Bank of Poland, worthUSD 73.8 million (EUR 63.2 million).

Bulgariaís long-term obligations to private creditors totaled USD 5,220.4 mil-lion, a decrease of USD 68.4 million compared with end-1997. This is attributableto a withdrawal of investment in Bulgarian government securities (foreign currency-denominated ZUNK bonds). Foreign currency ZUNK bonds are treated as foreigndebt if they are held by nonresidents.

36

Change inDebt

Indicators

STRUCTURE OF GROSS FOREIGN DEBT BY CREDITOR

Source: BNB.

According to 1998 preliminary data, the bulk of the countryís foreign debt pay-ments (USD 1,105.4 million) are made on principal repayments (57.2%). Comparedwith 1997, foreign debt payments increased by USD 208.3 million, including princi-pal repayments of USD 175.1 million and interest repayments of USD 33.2 million.The increase in foreign debt payments in 1998 reflects the settlement of Bulgariaísobligations to the International Bank for Economic Cooperation.

GROSS FOREIGN DEBT REPAYMENTS IN 1998

(million USD)

I quarter II quarter III quarter IV quarter Total

Principal 253.6 49.7 189.3 139.9 632.5Interest 198.4 32.6 200.6 41.3 472.9Total 452.0 82.3 389.9 181.2 1,105.4

Source: BNB.

In 1998 foreign debt payments to official creators totaled USD 718.3 million,including principal repayments of USD 536 million and interest repayments ofUSD 182.3 million. The bulk of payments were made to the IMF (USD 227.6 mil-lion, including principal repayments of USD 182.6 million and interest repaymentsof USD 45 million); to the European Union (USD 173.3 million, including principalrepayments of USD 161.6 million and interest repayments of 11.7 million); to offi-cial Paris Club creditors and on nonrescheduled debt (USD 158 million, includingprincipal repayments of USD 98.1 million and interest repayments of USD 59.9 mil-lion).

Foreign debt repayments to private creditors both on long-term and short-termloans totaled USD 387.2 million, including principal repayments of USD 96.5 mil-lion and interest repayments of 290.6 million.

With gross domestic product growth (in dollar terms) exceeding gross foreigndebt growth, the ratio of gross foreign debt to gross domestic product improved from95% at the end of 1995 to 82% by the end of 1998.

As a result of the countryís growing gross obligations and a significant drop inexports of goods and nonfactor services in 1998 the ratio of gross foreign debt to

Gross ForeignDebt Service

1997 1998

Arrears (9.8%)

Brady bonds (50.9%)

Other(12%)

IMF(9.7%) World

Bank(5.6%) EU

(3%)

Paris Club andnonresheduled

debt(9.1%)

Arrears (6.4%)

Brady bonds (49%)

Other(12.1%)

IMF(11%)

WorldBank(7%) EU

(4.2%)

Paris Club andnonresheduled

debt(10.3%)

37

exports of goods and nonfactor services deteriorated: from 154% in 1997 to 182% atthe end of 1998.

The ratio of foreign debt service to gross domestic product remained unchangedat little below 9%.

The ratio of foreign debt service to exports of goods and nonfactor services dete-riorated: from 14.3% at the end of 1997 to 19.9% in December 1998. This is due tolarger debt payments on the foreign debt effected in 1998 (including those relatedto settlement of Bulgariaís obligations to the International Bank for Economic Co-operation) and lower exports of goods and nonfactor services.

Due to reduced overdue payments consistent with the restructuring of thecountryís debt to the former GDR and to the National Bank of Poland and thesettlement of obligations to the IBEC, the ratio of short-term debt to gross domesticproduct improved considerably: from 11% at the end of 1997 to 6.8% in December1998.

A growth in BNB forex reserves, combined with decreased nonresidentsí de-posits and investments in government securities, contributed to a considerable im-provement in the ratio of total nonresidentsí deposits and government securities heldby nonresidents to BNB forex reserves. The ratio indicates the degree of cover forthese obligations by BNB official forex reserves. It fell from 11.3% in December1997 to 5.5% in December 1998.

The ratio of short-term debt to gross foreign debt improved: from 11.5% inDecember 1997 it fell to 8.3% in December 1998, mainly due to restructuring ofBulgariaís debt to the former GDR and to the National Bank of Poland and thesettlement of obligations to the International Bank for Economic Cooperation.

DEBT INDICATORS

(%)

1991 1992 1993 1994 1995 1996 1997 1998

Gross foreign debt/GDP 161.1 160.5 130.5 118.1 78.1 101.9 95.1 82.0Gross foreign debt/exports 296.0 274.7 282.5 218.4 149.8 152.1 154.2 182.1Gross foreign debtservice/GDP 3.2 5.1 4.0 15.1 7.5 11.6 8.8 8.9Gross foreign debtservice/exports 5.8 8.8 8.7 27.9 14.5 17.2 14.3 19.9Short-term debt/GDP 125.9 123.7 99.8 21.6 10.1 10.1 11.0 6.8(deposits+governmentsecurities)/forex reserves 0.0 149.5 156.9 37.8 13.6 20.3 11.3 5.5Short-term debt/grossforeign debt 78.1 77.1 76.5 18.3 12.9 9.9 11.5 8.3

Source: BNB.

38

31 Information on the cash basis reporting of the consolidated state budget is based on the MFís monthlypublication The Budget, and is not final.

3. Fiscal Sector

Thanks to the imposition of financial discipline the 1998 fiscal year saw im-proved conditions compared with previous periods. In technical terms, the yearbegan with a budget which had been duly adopted. This contributed to smooth bud-get operation, prepared the ground for the conclusion of a three-year agreementwith the IMF, and helped outline the countryís relationships with other internationalfinancial organizations. Once prices stabilized, the budget was adopted, imple-mented and controlled without any particular problems. The conduct of a balancedbudget policy made possible the maintenance of a cash surplus through most of theyear, a key factor for the stability of the currency board.

Consolidated State Budget31

For the first time since the outset of economic reforms the year ended with abudget surplus. This is attributable both to enhanced tax collection and the policy ofconstraints in government spending. The bulk of unexpected and one-off revenueswere retained, while operating revenues exceeded SBL projections. As planned, aportion of the accumulated surplus in the first three quarters was used for salaryand pension supplement payments in the last quarter, and for financing some mu-nicipal infrastructure projects. As regards government budget financing, negativebank financing and lower revenues from privatization were completely offset by thestable fiscal position.

On the expenditure side the share of the budget in GDP increased comparedwith the previous year. However, a comparison of expenditures for a longer termconfirms the general trend toward their contraction. From this point of view, andgiven the adopted macroeconomic strategy and medium-term policy of develop-ment, 1998 may be viewed as having launched a process of reducing the economicfunctions of the budget, limiting the range of public services on offer and quantita-tively restructuring.

The level of public service expenditure remained high: education accountedfor 10% of total expenditures; health care: 9.3%; and social security and supplemen-tary payments: 29.6%. Insufficient incentives for private enterprise and the slow in-troduction of market principles kept these expenditures close to their level in theprevious year and enhanced to a certain extent the allocating role of the budget.Transfers provided to cover the deficits of individual budgets and to replenishextrabudgetary accounts and funds accounted for a considerably higher share in thestructure of total expenditures as compared with 1997: from 47% to 71%.

In structural terms, the current expenditure component continued to prevail.Its high levels restrained capital formation, and hence the possibilities of outputquality improvement, and supply and consumption of public goods and services.Cautious use of nonbudgetary sources (extrabudgetary funds, own revenues or for-eign financing) additionally inhibited opportunities for restructuring.

Central government budget expenditures comprised 97.6% of SBL and 18.3%of GDP. Due to dramatically reduced interest payments the share of current expen-ditures in total expenditures decreased considerably compared with the previousyear (from 51.9% to 28.1%).

The beginning of the fiscal year saw the introduction of new tax laws on cor-porate profits and physical personsí incomes and amendments to the Law on theValue Added Tax, whereby tax discipline and revenue collection, especially in theprivate sector, improved. Reported net revenue on the consolidated state budget atthe end of 1998 accounted for 37.5% of GDP, against 32.4% in 1997.

Total revenues to the central government budget accounted for 124.2% againstSBL estimates and 19.8% of GDP.

39

The analysis of data on the cash basis performance of the central governmentbudget by month shows that, in contrast with the previous year, revenues in 1998 weremore evenly distributed and larger in amount. The average monthly amount of rev-enues in 1998 approximated BGL 354 million, while in 1997 it was BGL 248.6 million.

Tax revenues comprised 94.1% of total revenues. The execution (against SBLestimates) was 119.7% while collected revenues accounted for 18.6% of GDP. Theshare of Value Added Tax revenues in tax revenues remained the largest (45.9%).Corporate tax revenues had the largest percentage of performance against SBL pro-jections, both from nonfinancial enterprises (144.4%) and financial institutions(130.6%).

CENTRAL GOVERNMENT BUDGET REVENUE BY MONTH

(billion BGL)

Source: MF.

Budget Balance

As a result of positive changes in the amount and structure of central govern-ment budget revenues and expenditures, as of 31 December 1998 a primary surplusof BGL 1,157.1 billion was reported, or 296% of SBL estimates and 5.4% of GDP.

The generated primary surplus on the central government budget proved suf-ficient to cover interest payments and as of 31 December 1998 a comparativelylarge internal surplus of BGL 925.1 billion and a cash surplus of BGL 314.7 billionwere reported. For the first time in the last years a cash surplus was reported bothon the central government budget and the consolidated state budget.

Positive trends in the cash execution of the central government budget devel-oping during the year led to a significant reduction in general borrowing require-ments of the budget.

0

50

100

150

200

250

300

350

400

450

500

1997 1998

I II III IV V VI VII VIII IX X XI XII

40

CENTRAL GOVERNMENT BUDGET BALANCE

(billion BGL)

Source: MF.

Budget Financing

Net foreign and domestic financing adopted by the SBL totaled BGL 610.8 bil-lion. In December the government received a loan of BGL 72.8 billion from theWorld Bank, but as a result of repayments on external loans made during the yeara significant negative foreign financing (net) was reported as of 31 December 1998.

CENTRAL GOVERNMENT BUDGET FINANCING

(billion BGL)

Source: MF.

Long-term loans extended to the MF by the central bank pursuant to Article 45of the Law on the BNB were used as a domestic32 source of budget financing, split

Primary surplus Cash deficit/surplusInternal deficit/surplus

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

1200

1997 SBL June 1997 December 1997 1998 SBL June 1998 December 1998

-800Foreign

financingGovernment

securities, netBNB, net Budget

depositBudgetbalance

Otherfinancing

Revenue fromprivatization

Foreign currencyrevaluation

1997 1998

-600

-400

-200

0

200

400

600

800

32 With regard to the State Budget, IMF tranches are recognized as domestic financing, since these areextended to the BNB which in turn loans them to the government.

41

by months as follows: August SDR 62.15 million, October SDR 52.3 million, andNovember SDR 52.3 million. Taking into account the specific nature of this source,it was extremely important to coordinate budget borrowing requirements at any timewith the schedule for the purchase of SDR from the IMF. After the Ministry of Fi-nance made regular repayments on the debt to the BNB, a positive net financingfrom the central bank totaling BGL 174.1 billion was reported.

Fiscal Reserves

Fiscal reserves are a resultant value and are therefore dependent on budgetrevenues, the government securities market, foreign and domestic loans, as well ason budget expenditures.

The analysis of data on fiscal reserves dynamics shows that in the first quarterof 1998 the major factors contributing to their growth are the use of foreign loansfrom the EU and the World Bank. In the second quarter fiscal reserves continuedgrowing gradually. At the end of the July ≠ September period fiscal reserves de-clined as a result of repayments to foreign creditors. In the last quarter their amountmatched that of the previous quarter.

As of 31 December 1998 fiscal reserves totaled BGL 1,702.8 billion: an in-crease of 21% on end-1997. Deposits of the central government budget had the larg-est and a relatively constant share in fiscal reserves (41 to 50%). The second com-ponent of fiscal reserves are the SFRD funds, which comprised 35% of total fiscalreserves at the end of the reporting year. Funds on extrabudgetary accounts are thethird component affecting fiscal reserves. During the year their amount was rela-tively constant.

DYNAMICS OF FISCAL RESERVES AND

CONSOLIDATED STATE BUDGET BALANCE IN 1998

(billion BGL)

Source: BNB and MF.

Amount and Structure of Government Debt

Changes in domestic economic policy and achieved price stability facilitated toa great extent management and service of government debt.33 As of 31 December1998 it totaled BGL 18,635.4 billion. Its share in GDP decreased from 106.8% atthe end of 1997 to 86.7% at the end of 1998.

Fiscal reserves, BNB and CB

CSB balance

Fiscal reserves, BNB

-200

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

31.I 28.II 31.III 30.IV 31.V 30.VI 31.VII 31.VIII 30.IX 31.X 30.XI 31.XII

33 Directly serviced by the general government budget and the SFRD.

42

GovernmentBudget

Foreign Debt

GOVERNMENT DEBT STRUCTURE

Amount as of Share to GDP Amount as of Share to31 Dec. 1997 for 1997 31 Dec. 1998 GDP for(million BGL) (%) (million BGL) 1998 (%)

Domestic debt 4,399,694.30 25.7 4,767,694.10 22.2Foreign debt 13,871,190.21 81.1 13,867,679.77 64.5

Debt, total 18,270,884.51 106.8 18,635,373.87 86.7

Source: MF, BNB and NSI.

Developments in the amount and structure of domestic debt depended on thefollowing factors: imposed higher responsibility in relation to disposition and spend-ing of budgetary funds and improved discipline and control on revenue collectionlimited the necessity of budget financing through debt issue; definition of the obli-gations and responsibilities of individual units in the public sector and avoidance ofnonmarket approaches to management limited the possibility of quasi budget defi-cits; achieved general economic stability helped improve the maturity structure ofthe debt whereby the share of long-term securities rose; and use of debt instrumentsfor payment in privatization deals.

Reported data for 1998 shows an 8.4% increase in government domestic debtcompared with 1997. Debt on government securities issued for budget deficit financing(including target issues tailored to physical persons) decreased from BGL 807.7 billionat the end of 1997 to BGL 749.9 billion at the end of 1998, or 7.2%. In structural terms,this debt comprised 19.1% of total debt amount, against 18.4% at the end of 1997.

Direct debt to the BNB rose from BGL 1,620.1 billion at the end of 1997 toBGL 1,665.9 billion as of 31 December 1998, or 2.8%. Neverheless, its share toGDP for 1998 decreased to 7.8% against 9.5% at the end of 1997. Direct debt tothe BNB had the largest share in domestic debt structure and accounted for 42.4%of total domestic debt, against 36.8% in 1997.

As of 31 December 1998 the share of debt on long-term government bondsissued to convert the nonperforming debts of state companies to banks into govern-ment debt, outstanding debts from municipalities on SSB house-building loans, andoutstanding debt on government securities under the Law on State Protection ofDeposits and Accounts with Commercial Banks (government securities for struc-tural reform) accounted for 38.5% in total domestic debt, against 44.8% in 1997.This debt decreased from BGL 1,971.8 billion at the end of 1997 to BGL 1,512.3billion at the end of 1998, or 23.3%.

Government securities (denominated in levs and foreign currencies) ofBGL 203.2 billion were used as legal tender in privatization deals.34

As of 31 December 1998 government foreign debt and government guaranteeddebt under loan agreements ratified by the National Assembly, calculated in USdollars, totaled USD 8,278.7 million.35 The lev equivalent amount of the foreigndebt was BGL 13,867.7 billion. The share of foreign debt to GDP was 65.4%. Directgovernment budget debt totaled USD 7,674.54 million at the end of the year, or93% of total foreign government debt, and the debt on loans guaranteed by theBulgarian government was USD 604.2 million, or 7% of total foreign debt.36

34 The equivalent in US dollars is calculated at the BNB central exchange rate of the lev valid for 30December 1998.35 Government budget foreign debt does not include interest arrears to former Comecon creditors. Theequivalent in US dollars is calculated at the BNB central exchange rates of respective currencies againstthe lev valid for 30 December 1998.36 Data complies with the BNB automated register of public and publicly guaranteed debts based onofficial MF information on loan agreements ratified by the National Assembly. Excluded from the aboveamount is the SDR-denominated debt to the IMF, since direct credits extended by the BNB to the MFunder Article 45 of the Law on the BNB for SDR purchases have been included in domestic debt.

GovernmentBudget

Domestic Debt

43

STRUCTURE OF FOREIGN GOVERNMENT DEBT BY CREDITOR

AS OF 31 DECEMBER 1998

Source: MF.

Between 1 January and 31 December 1998 debt repayments to foreign credi-tors, including government guaranteed loans, amounted to USD 839.7 million: USD426.2 million in principal repayments and USD 413.5 million in interest repayments.Repayments made with government budget funds comprised 59% of total repay-ments, those made with SFRD funds accounted for 34%, and those with final debt-ors 7%.

The total amount of the newly obtained foreign financing was USD 639.7 mil-lion; of this amount, some 68.2% of foreign loans made by international financialinstitutions were made in support of the balance of payments and for budget-fi-nanced programs. During the period under review agreements on the settlement andconsolidation of the debts to the former GDR and the National Bank of Polandwere signed. As a result of MF negotiations the debt to the IBEC was repaid.

4. Monetary Sector

The year under review, 1998, is the first full calendar year after the introduc-tion of the currency board. This makes it possible to outline its major effects on thedevelopment of the monetary sector. Low inflation reported at the end of the yearentailed a positive growth in key monetary and credit aggregates, despite their mod-est nominal increase. In this regard, there are grounds for assuming that in condi-tions of attained financial stability the national economy was gradually remonetized,though at a slower pace than in the first months following the introducing of the fixed exchange rate.Confidence in the banking system was still fragile and money demand, primarily inthe form of savings, was reviving slowly, although real interest rates on deposits, incontrast with previous years, turned positive. Against the background of enhancedliquidity, typical of a currency board, real interest rates on credits stood relativelyhigh. This is mainly attributable to the preserved interest spread of more than tenpercentage points, which reflects the still-existing risk in the real sector and low ef-ficiency, combined with commercial banks' highly cautious lending policies. Never-theless, credit to the real sector posted a moderate growth (6.3%) and was predomi-nantly directed to private companies and individuals. Commercial banks' conserva-tive lending policies, combined with stricter BNB banking supervision, helped avoid

Brady bonds(60.1%)

EU(5.1%)

World Bank(8.6%)

Paris Club(12.6%)

G-24(1.1%) IMF

(1.4%)

EIB(2.5%)

EBRD(1.3%)

Other(7.2%)

44

0

1000

2000

3000

4000

5000

6000

7000

I'98 II III IV V VIVI'97 VIIVII VIIIVIII IXIX XX XIXI XIIXII

Currency outside banks

Savings deposits

Demand deposits

Foreign currency deposits

Time deposits

Import and restricteddeposits

fast credit expansion thus limiting the risk of unleashing a new wave ofnonperforming credits.

Under a currency board regime, the BNB could not actively regulate moneysupply: the percentage of minimum required reserves remained unchanged andthere was no need to employ the lender of last resort function to refinance commer-cial banks. Under these conditions it may be assumed that monetary aggregatesdynamics reflected economic agentsí demand. In 1998 money supply, measuredthrough the broadest monetary aggregate, including currency outside banks and alltypes of deposits, rose by BGL 578.6 billion, or 9.6%. For the first time in the lastseveral years a real growth was reported, 8.6%. Confidence in the national currencywas reviving: lev component nominal growth was BGL 618.5 billion and 17.1% inreal terms. As a result its share in money supply increased: from 56.4% at the endof 1997 to 60.8% a year later (before the introduction of the currency board in mid-1997 this indicator was 40%).

In 1998 broad money grew mainly as a result of the growth in the most liquidcomponents. The M1 monetary aggregate, including currency outside banks anddemand deposits, comprised 93% of total money supply growth, and 22% in realterms. Within the components of high liquid money, currency outside banks grewmost: by 31% in real terms and accounted for 74% of total money supply growth.Outlined dynamics may be assumed as an indicator of growing confidence in thenational currency for transaction purposes. At the same time, however, the in-creased preference for cash among all economic agents should not be overlooked.It may be indicative both of still low level of noncash payments and of the greyeconomyís growth. Demand deposits increased by 10% in real terms, completelyattributable to private companies and individuals.

MONETARY AGGREGATES DEVELOPMENTS

(billion BGL)

Source: BNB.

In 1998 quasi-money, including lev time and savings deposits and foreign cur-rency deposits, grew by BGL 42 billion alone, or 0.3% in real terms. Although theincrease is in the lev component, in dollar terms foreign currency deposits also in-creased by around USD 66 million.

MonetaryAggregates

45

STRUCTURE OF MONETARY AGGREGATES

Source: BNB.

Ongoing preference for foreign currency deposits, especially among the public,clearly shows that reviving confidence in the lev as a store of value would be a slowand difficult process. The low level of savings, particularly in the national currency,severely limits commercial banksí credit resources. In 1998 there was no shortage ofcredit resources due to government sector repayments and a continuing high level ofrisk in the real sector. However, accelerated economic growth set to become asteady factor for the improved standard of living of the population will require sig-nificant credit resources based on domestic savings growth. The alternative of at-tracting resources from abroad through higher interest rates is inevitable under acurrency board arrangement, but the costs to be paid by the real and the banking sec-tors will be much higher and probably unbearable for most borrowers, financial inter-mediaries included.

RESERVE MONEY AND MONEY MULTIPLIER

VIí97 XIIí97 VIí98 XIIí98

Broad money, billion BGL 4,011.0 6,018.6 6,045.4 6,597.2Reserve money, billion BGL 1,110.1 2,174.2 2,074.2 2,387.4

Money multiplier 3.61 2.77 2.91 2.76Currency outside banks/deposits (%) 16.0 27.9 30.6 35.9Bank reserves/deposits (%) 6.1 18.3 14.2 13.3

Source: BNB.

In 1998 no significant changes occurred in the scale of money multiplication.Reserve money, which multiply to money supply, rose by 9.8%, a growth rate closeto that of broad money. The money multiplier, reflecting the scale of reserve moneymultiplication, was 2.76 in 1998: nearly matching the figure for 1997 (2.77). In struc-tural terms, however, considerable changes occurred in the major factors impactingthe money multiplier, which cancelled each other out. The ratio of currency outsidebanks to deposits rose from 27.9% to 35.9%, completely attributable to the exces-sive growth in currency outside banks driven by enhanced demand from individualsand companies. Other conditions being equal, this would cause a reduction in themoney multiplier and in the scale of reserve money multiplication. At the same timethe ratio of bank reserves to deposits fell from 18.3% to 13.3%. Its dynamics shows

31 December 1997 30 December 1998

Currencyoutside banks

(21.8%)Currency

outside banks(26.4%)

Demanddeposits(16.2%)

Demanddeposits(16.5%)

Timedeposits(13.4%)

Timedeposits(11.9%)

Savingsdeposits(3.8%)

Savingsdeposits(4.4%)

Foreigncurrencydeposits(40.4%)

Foreigncurrencydeposits(36.8%)

Import andrestricteddeposits(4.5%)

Import andrestricted deposits

(4%)

46

%

10

15

20

25

30

35

40

2.5

2.7

2.9

3.1

3.3

3.5

I'98 II III IV V VIVI'97 VIIVII VIIIVIII IXIX XX XIXI XIIXII

Bank reserves/deposits(left scale)

Currency outsidebanks/deposits(left scale)

Moneymultiplier(right scale)

a lower level of commercial banksí excess reserves reflecting their efforts at bettermanagement of disposable funds, thus offsetting the first factor.

BROAD MONEY CHANGE AFTER CURRENCY BOARD INTRODUCTION

(billion BGL)

1997 1998

July ≠ Dec. Jan. ≠ June July ≠ Dec. Total

Broad money change, 2,007.6 26.8 551.8 578.6from: reserve money 3,844.7 -277.1 912.9 635.9 money multiplier -1,837.0 303.9 -361.1 -57.3Developments in money supplyby reserve money source: 3,844.7 -277.1 912.9 635.9 Net foreign assets 3,680.6 1,361.2 -367.1 994.1 incl. foreign reserves 5,784.6 2,350.4 -364.5 1,985.9 Net domestic assets 164.0 -1,638.3 1,280.0 -358.3 incl. net claims on government -287.2 -1,776.5 1,257.6 -518.9 claims on banks 83.1 -191.4 -26.2 -217.7

Source: BNB.

Throughout 1998 broad money growth was accounted for by reserve moneygrowth. Reserve money contributed to an increase in broad money by BGL 635.9billion while the impact of the money multiplier was negligible: its decrease by 0.01led to broad money contracting by BGL 57.3 billion. Under a currency board ar-rangement, money supply dynamics in terms of reserve money is not determined bythe BNB. Changes in reserve money sources (net foreign and domestic assets) re-flect preferences of economic agents (banks, individuals, companies, and govern-ment) which affect significantly reserve money through their components (currencyoutside banks and bank reserves).

MONEY MULTIPLIER AND ITS COMPONENTS

Source: BNB.

Growth in net foreign assets exceeded reserve money growth and determinedit completely. Within net foreign assets components, forex reserves growth contrib-uted most significantly to reserve money growth, and hence broad money. It waspartially offset by foreign liabilities growth resulting from positive net financingfrom the IMF. The excess of forex reserves growth over reserve money growth and

47

money supply growth results in their increased ëcoverí by forex reserves: from 202%to 73% respectively at the end of 1997 to 214% and 78%, which strengthens thestability of the currency board.

Throughout 1998 net domestic assets dynamics contributed to a decrease in re-serve money, and hence in money supply. The impact was exerted along the twochannels of interaction: through BNB net claims on the government sector and BNBclaims on commercial banks. In 1998 growth in government deposits with the BNBexceeded BNB claims on government. The net growth in funds was fully sterilizedby the rules of the currency board and could not contribute to reserve money andmoney supply growth. BNB collection of overdue claims on some commercial banksin liquidation had a similar effect: collected funds were automatically sterilized andwent out of the process of money multiplication. In this context, government restric-tive fiscal policy combined with BNB efforts at collecting old overdue claims helpedrepress reserve money and money supply growth. This way the two institutions indi-rectly limited the possibilities of an internal inflationary pressure on the currencyboard and contributed to its smooth operation from a monetary point of view.

In 1998 dynamics of the broadest monetary and credit aggregates moved inopposite directions: while broad money grew by BGL 578.5 billion, domestic creditdeclined by BGL 909.5 billion. The main factor for contracted domestic credit wasthe continuing considerable decline in net claims on government sector due to thestrengthened position of the state budget which reported a cash surplus for the firsttime since the start of transition to a market economy. Funds deposited with banksby individuals, companies and the government could not be fully ëutilizedí domesti-cally because of the existing high risk in the real sector and commercial banksí cau-tious lending policies. A portion of these funds was redeposited abroad, causing netforeign assets to grow. The method of reporting open foreign currency positions ofcommercial banks also contributed to this, as the reserve currency is exempt fromregulation. This situation arose from the rules of the adopted currency board andshould not be considered a barrier to a more extensive lending to the real sector andincentives for economic growth. The problem is not related to the monetary regimeof a fixed exchange rate but to the real sector restructuring and development oflending skills among commercial banks.

In 1998 net claims on the government sector decreased by BGL 1,132 billion.Approximately BGL 500 billion of this decrease is attributable to the modifiedmethodology of reporting government securities which had to be recorded in com-mercial bank balance sheets at their market value as of December 1998, instead of atnominal value. The remaining decrease is due to a growth in government deposits, inparticular those with the BNB, and the negative net issue of government securities.

Strengthening of the state budget is a key factor for the expansion of creditresources to the real sector, given the relatively slow growth in money supply.

In 1998 claims on the real sector rose by BGL 222.3 billion, or 5.4% in realterms. If the written off bad debts of banks in liquidation are eliminated, operatingbanksí credit to the real sector grew by BGL 701.2 billion, or 40.5%. These figuresshow that commercial banks gradually changed their policies toward enhanced lend-ing activities. In this sense, claims that the real sector is constrained by a lack ofcredit have ever fewer justifications.

CreditAggregates

48

31 December 1997 30 December 1998

Claims onprivate sector

(43.6%)Claims on

private sector(60.7%)

Claims onpublic sector

(24.4%)

Claims onpublic sector

(25.5%)

Claims ongovernment, net

(32%)

Claims ongovernment, net

(13.8%)

DEVELOPMENTS IN DOMESTIC CREDIT

(billion BGL)

Source: BNB.

The bulk of the increase came from the lev component: for the operatingbanks it was BGL 637.9 billion, or 76.7% in real terms. Lending in foreign currencygrew at a much slower pace: USD 67.2 million in dollar terms, or around 14%. Asa result, the share of all banksí lev claims on the real sector accounted for 42.5% atthe end of 1998, against 26.7% at the end of 1997. For operating banks alone, itsgrowth was 48.6% against 61.1%.

STRUCTURE OF DOMESTIC CREDIT

Source: BNB.

The process of directing credit resources to private companies and individualscontinued. Claims of operating banks on state companies decreased by BGL 134.2billion, while claims on the private sector rose by BGL 835.4 billion, or 83.8% in

0

1000

2000

3000

4000

5000

6000

I'98 II III IV V VIVI'97 VIIVII VIIIVIII IXIX XX XIXI XIIXII

Government, net

Claims on:

Public sector Private sector

49

real terms. The bulk of this increase is due to the lev component: BGL 679 billion,or 132% in real terms. Foreign currency credit grew by USD 109 million in dollarterms, or around 40%. At the end of 1998 the share of operating banksí credit to theprivate sector was 76.2%, against 58.3% a year ago. Practical isolation of the major-ity of state companies from new credit left sufficient funds for the private sector andfacilitated its accelerated development. At the same time, delayed privatization in thereal sector hampered commercial banks and did much to retain the high nominal andreal interest spread, which limits the opportunities for accelerated economic growth.

During the year lending to individuals expanded considerably; in operatingbanks it grew by BGL 316.9 billion, or 186.6% in real terms. The bulk of credits wasmade by the SSB, which continued to transform its assets from maturing govern-ment securities to household credits. In the last quarter of the year the bankchanged its lending policy: new credits are made within the amount of repayments,and the total exposure to the sector remained relatively stable. There is no groundto assume that household borrowing requirements were satisfied; rather the bankísfree credit resources were exhausted. Expansion of its operations to include deposit-taking in foreign currency may help attract additional resources to provide lendingto households and their small businesses.

Financial stability in combination with a stronger banking system may facilitatethe ongoing process of remonetization in the national economy in the wake of thedeep financial and economic crisis of 1996 and early 1997. Synthetic indicators ofthe development of this process are the ratio of broad money to GDP and the ratioof credit to the real sector to GDP. Comparison of the data for 1998 with those for1995 (the last pre-crisis year) indicate both the depth of the collapse and the extentand speed of the subsequent recovery. Concurrently, comparison with similar datafor other countries in transition and/or under currency board arrangements makesit possible to outline Bulgariaís place in a broader global aspect.

Data for Bulgaria before the crisis (1995) shows a relatively high scale of mon-etization of the national economy. It is much higher than in most central and eastEuropean countries in transition (i. e., Poland, Hungary, and Romania) and someformer Soviet republics (i. e., Estonia and Lithuania). The level attained is evenhigher than that in Greece, a member of the European Union and a candidate foraccession to the European Monetary Union. Of the countries in transition, only theCzech Republic has higher values of these indicators, but the latter is markedlygreater than those of other former socialist countries. The cross-country analysis ofthe data gives ground to assume that the scale of monetization of the nationaleconomy in 1995 was atypically high and inconsistent with the low market orienta-tion of the real sector. In this sense, delayed restructuring of the national economyand general weakness of the banking system have predetermined to a great extentthe depth of the following financial crisis.

SCALE OF MONETIZATION OF THE NATIONAL ECONOMY

(%)

Country Year Broad money/GDP Credit to real sector/GDP

Argentina 1996 21 18

Bulgaria1995 66 401998 30 17

Greece 1996 64 26Estonia 1997 30 34Lithuania 1997 19 10Poland 1997 40 25Romania 1997 25 14Hungary 1995 42 23Czech Republic 1997 71 77

Source: International Financial Statistics. IMF.

Scale ofMonetization

50

During the crisis in 1996 and early 1997 the monetary sector contractedsharply, due both to a strong devaluation of the lev, a subsequent (though short-lived) period of hyperinflation, and the closing of a third of operating banks. At theend of 1998, a year and a half after the introduction of a fixed exchange rate undercurrency board rules (which partially revived confidence in the national currencyand banks) major ratios reflecting the scale of monetization are twice less than pre-crisis ones. With regard to the proportion of broad money to GDP, Bulgariaís levelis close to that of Estonia, leaving behind Lithuania and Argentina (all three coun-tries have currency boards). Compared with other transition economies, Bulgaria isstill ahead of Romania but lags behind Poland and Hungary, and in particular theCzech Republic. The attained level seems more normal than before and a fastchange is unlikely, given the currently low level of domestic savings. With regard tothe proportion between credit to the real sector and GDP, the situation is similar.Among the countries with currency boards, Bulgaria closely approaches Argentina,exceeds Lithuania, but lags far behind Estonia; among former socialist countries, theleaders are again the Czech Republic, Poland and Hungary, and the laggard is Ro-mania. Bulgariaís position in relation to this indicator may be assumed as adequatefor the time being. A considerable increase in the ratio of credit to the real sector togross domestic product would contribute to sustainable economic growth, providedthat the risk in the real sector is reduced after its restructuring and efficiency in thebanking system improves after its privatization.

51

III. Foreign Exchange Reserve

Management and Issuing Activities

52

53

1. Structure and Management of Foreign

Exchange Reserves

Gross foreign exchange reserves gradually increased in most months of 1998:with a low reported in early year and a high in the summer, and a modest decreasein the third quarter due to payments on foreign debt service.

Foreign debt payments and foreign loans extended in support of the balance ofpayments are the major factors responsible for the current changes. Revenue and in-creased market value of the bulk of assets (government securities) also contributedto the increased gross forex reserves.

GROSS FOREIGN EXCHANGE RESERVES IN 1998

(assets of the Issue Department)

(million DEM)

Source: BNB.

Dynamics of the basic balance sheet items of the Issue Department indicatesa close tie between the Cash and Nostro Accounts in Foreign Currency item (thebulk of which includes deposit accounts) and the Foreign Securities item. TheBNBís investment strategy to rechannel funds from short-term deposits to securitiesand vice versa brought about changes in the general trend of both items which arealmost diametrically opposed.

Monetary gold retained relatively constant values, following the price of goldin international markets. When the gold price in international markets exceededDEM 500, gold was valued at the price fixed by the Law on the BNB.

In general the Currency in Circulation item indicated a gradual increase dur-ing 1998, consistent with the overall increase in gross foreign exchange reserves and

Cash and nostro accountsin foreign currency

Monetary gold

Foreign securities

0

1000

2000

3000

4000

5000

6000

Accrued interest receivable

I II III IV V VI VII VIII IX X XI XII

54

money supply. Current changes depend on seasonal fluctuations in the economy anddemand for cash by economic agents. To this end, the BNB has limited abilities todirectly regulate currency outside the bank.

Within liabilities of the Issue Department balance sheet, changes in the gov-ernment deposits and accounts item indicate two clear trends. In general govern-ment funds gradually increased in the first half of 1998, reaching a high in mid-year,and gradually decreased to the early yearís level during the second half of 1998.

The significant deviation from the general trend reflects primarily the differenttimings of government repayments of the countryís foreign debt, and receipt of for-eign financing. A decline in gross foreign exchange reserves in the summer was a re-sult of sizable foreign debt repayments (equivalent to approximately USD 500 mil-lion) made from BNB accounts and the receipt of significant foreign financing insupport of the balance of payments just at the yearís end.

Structure of Foreign Exchange Reserves

In 1998 serious changes were made in the structure of assets by financial in-strument, consistent with the need for improving the safety of BNB funds investedwith other foreign agents and maintaining a liquidity ensuring particular yield. TheBNB duly initiated measures intended to rechannel funds from commercial banksinto government securities, with a view to avoiding risks ensuing from financial cri-ses in Asia, Russia and Latin America.

To minimize bank risk the BNB purchased securities. Simultaneously, funds ondeposit and current accounts with commercial banks were reduced. By the end of1998 the share of securities in total assets declined to 30.2%, reflecting increaseddeposits with central banks. Securities purchased by the BNB comply with the pro-visions of the Law on the BNB and meet the criteria adopted by the BNB Manag-ing Board and the Bankís Investment Committee.

The share of deposits in total assets decreased between March and September1998, ranging from 12.6% to 15.6%. At the onset of the Russian crisis in August1998, and the Brazilian crisis in the third quarter of 1998, the BNB shifted DEM-de-nominated deposits from commercial into central banks. Therefore, the share of de-posits was insignificant in October and November. Minimum funds were maintainedto cover liquidity requirements, associated with payments of budget organizations.

The BNB maintained insignificant funds on current accounts with foreign com-mercial banks. The quantity of monetary gold remained unchanged. Decreasedshare of monetary gold in total assets in May, June, July, August, and Decemberwas due to the lower international price of gold. Following the restructuring of for-eign exchange reserves, BNB exposure to foreign commercial banks was signifi-cantly reduced, thus decreasing the bank risk for the BNB. The share of funds in-vested with foreign commercial banks (in current accounts, deposits in foreign cur-rency and precious metals, and portfolio management) was decreased to 6% by end-1998 from 58% early in the year.

Structure ofAssets byFinancial

Instrument

55

STRUCTURE OF ISSUE DEPARTMENT ASSETS

BY FINANCIAL INSTRUMENT IN 1998

(%)

Source: BNB.

The currency structure of assets is based on the following factors: the purchaseand sale of Deutschemarks in the domestic market; foreign currency revenue andexpenditure on BNB accounts; foreign currency revenue and expenditure on ac-counts of the government and budget organizations serviced by the BNB; funds dis-bursed by international financial and banking institutions and other countries insupport of the balance of payments; exchange rate changes of currencies other thanthe Deutschemark and revaluation of assets and liabilities in these currencies; re-valuation of the market value of assets and liabilities; funds received and reim-bursed on the minimum required reserves of commercial banks.

Assets in Deutschemarks during 1998 ranged from 50% to 59%. The share offunds in US dollars fluctuated within wider limits than that of other currencies andgold. This reflects both the receipt of foreign loans and foreign and domestic debtrepayments by the government.

Structure ofAssets byCurrency

I II III IV V VI VII VIII IX X XI XII

0

20

40

60

80

100

Current accounts Deposits

Securities Precious metals

56

STRUCTURE OF ISSUE DEPARTMENT ASSETS

BY CURRENCY IN 1998

(%)

Source: BNB.

Management of Foreign Exchange Reserves

Foreign exchange reserves are managed in compliance with the Law on theBNB and strictly following the adopted internal norms. Management strategy forforex reserves in 1998 was determined by the BNB Investment Committee. Thestrategy pursued involves primarily risk control through the assessment of:

ï countries in whose currencies the BNB may invest;ï issuers of instruments in which the BNB may invest;ï BNB counterparties for the conduct of various types of transactions: trade in

foreign currency, deposits, current and settlement accounts, transactions insecurities and precious metals;

ï limits on trade with financial institutions;ï admissible financial instruments in which the BNB may invest;ï a benchmark currency in reserve management, including yield and risk lim-

its;ï a maximum admissible percentage or absolute amounts for investment in a

particular instrument within the respective investment portfolio.The list of countries in whose currencies the BNB may invest was approved by

the BNB. The BNB is authorized to invest in the national currencies of approvedcountries in compliance with Article 31, para. 3 of the Law on the BNB. Pursuant tothe provision of this Article îthe market value of assets denominated in foreign cur-rencies other than the Deutschemark, included in the gross international foreign ex-change reserves, shall not exceed by more than 2% the total amount of monetaryliabilities of the BNB denominated in the said currency and shall be not less than2% of these liabilities as the case may be∑.

Issuers of instruments the BNB may invest should be selected in accordancewith the criteria approved by the BNB Board on creditworthiness of the debt issuer,in conformity with the constraint prescribed by Article 28, para. 3 of the Law on theBNB.

The selection of BNB counterparties should be made in accordance with theprinciples approved by the BNB Investment Committee. There were two lists ofcounterparties in the early part of the year: the list of financial institutions with

InvestmentCommittee

Policy

I II III IV V VI VII VIII IX X XI XII

0

20

40

60

80

100

DEM USD

Other currencies Gold

57

whom the BNB may conduct transactions, various types of transactions and limitsfor BNB maximum individual exposure to these institutions; the list of financial in-stitutions with whom the BNB may open current accounts.

The increased number of transactions and the need to improve rating controlof individual institutions entailed the decision of the BNB Investment Committee onmaintaining a common list of counterparties and sublists of institutions for varioustypes of transactions such as: trade in foreign currency, deposits, current settlementaccounts, transactions in securities and precious metals. Initially, lists were updatedon a quarterly basis and later on a monthly basis at the sessions of the InvestmentCommittee. An individual limit is specified for each counterparty.

The selection of financial instruments is made in accordance with the rulesapproved by the BNB Board in the following order: 1) The issuer should be amongapproved countries and currencies; 2) The issuer should be among approved insti-tutions (in cases of investment in an instrument issued by a financial institution);3) The instrument should be among the approved types of instruments and its re-sidual term to maturity should be in compliance with specified investment limits.

The BNB is authorized to use the following financial instruments:ï banknotes and coins in freely convertible currency;ï deposit instruments:- current accounts;- special current accounts (investment accounts);- time deposits;ï debt instruments:- bills;- negotiable certificates of deposits;- floating rate notes- fixed rate notes- bonds;- jumbo pfandbriefe.The list of types of deposit and debt instruments is to be approved and up-

dated by the Investment Committee.

Positioning of BNB foreign exchange portfolios in 1998 was targeted at: pro-viding maximum safety of investment; maintaining high liquidity; realizing revenuefrom forex reserves management.

Safety and liquidity of investment was a priority during 1998. The BNB metthe goals of a central bank which are specified by the Law on the BNB, as well asthe principles of judicious international banking practice. To achieve the goals of re-serve management, foreign reserves were divided into two parts: liquid and invest-ment. Management of liquidity was extremely conservative intended to meet the re-quirement for high liquidity. Management of investment was active reflecting expec-tations for development of international markets.

The BNB had to maintain the bulk of foreign reserves in a liquid portfoliobecause 1998 was the first calendar year of the currency board and there was nohistory of demand and supply of reserve currency to be met by the BNB at any time.BNB liabilities included only so-called ëhot moneyí with a maturity of up to 30 days.Management of the investment portfolio was aimed at providing higher yield withinthe specified limits. Outright purchases and sales of securities were the major toolsemployed during 1998.

In 1998 the Issue Department conducted transactions in precious metals withforeign counterparties. In early 1998 these transactions were intended mostly tobring BNB foreign currency positions in line with the limits provided in the Law onthe BNB and the Investment Committee, and increase the share of actively managedgold reserves.

During 1998 gold market was characterized by dramatic price fluctuations,37

reflecting the impact of a number of divergent factors, inter alia, the Asian crisis, the

Positioning of BNBForeign Exchange

Portfolios

37 The price of gold varied from USD 270.75 to USD 314.50 per troy ounce.

58

Russian crisis, the Swiss Nazi gold scandal, rumors of gold selling by the IMF. Cen-tral banksí sales of gold affected gold prices most significantly.38 This coupled withthe increased liquidity in the market of gold deposits resulted in a continuous de-cline in interest rates of one-month deposits in gold: from 1.56% in January to 0.5%in December.

BNB deposit transactions in gold were based on the limits approved in theeffective trade rules concerning the counterparty, amount, deposit term and allsafety measures in case of a crisis in international markets.

Net Foreign Exchange Reserves and Revenue

In general net foreign exchange reserves gradually increased in 1998, a resultof received loans and realized current revenue from foreign exchange reserves man-agement.

DYNAMICS OF BANKING DEPARTMENT DEPOSIT

IN THE ISSUE DEPARTMENT IN 1998

(net foreign exchange reserves)

(billion BGL)

Source: BNB.

The dramatic increase in foreign exchange reserves by end-May reflected theUSD 166 million loan reported in the assets of the Issue Department. Due to trans-fer of half the amount to government accounts in early August, foreign exchange re-serves halved their previous growth.

The average annual yield of foreign exchange reserves (on a monthly basis)amounted to 3.41%. The yield of the actively managed portion of forex reserves (allassets, excluding monetary gold and BNB foreign currency vault) totaled 3.83% perannum. The yield realized from assets denominated in Deutschemarks was 3.36%per annum. The yield from assets denominated in US dollars amounted to 5.83%per annum.

38 The bulk of central banks began more active management of their gold reserves (mostly by depositingor swapping gold against US dollars).

min = 516

average 724

max = 981

500

550

600

650

700

750

800

850

900

950

1000

I II III IV V VI VII VIII IX X XI XII

59

NET REVENUE FROM MANAGEMENT OF FOREIGN EXCHANGE RESERVES IN 1998

(by instrument)

(million BGL)

Instrument I II III IV V VI VII VIII IX X XI XII Total

Current accounts 1,769 1,776 1,222 836 1,382 1,298 1,319 1,071 613 798 633 1,049 13,765Deposits 4,669 4,219 2,058 1,870 1,989 1,976 1,976 2,184 1,912 1,296 139 2,656 26,944Securities* 702 5,195 10,356 18,293 8,281 12,022 5,095 13,826 15,839 8,211 12,167 9,596 119,582Precious metals** 42 82 65 55 20 30 37 34 6 26 24 6 428Other*** 187 4 0 25 158 -7 -9 0 1 0 -1 52 412Total 7,370 11,275 13,702 21,080 11,830 15,320 8,417 17,115 18,371 10,331 12,962 13,359 161,131

* Including capital gains generated and capital losses incurred.** Excluding interest revenue paid in US dollars.

*** Including good value revenue and expenditure.

Source: BNB.

STRUCTURE OF NET REVENUE BY INSTRUMENT IN 1998

(%)

Source: BNB.

I II III IV V VI VII VIII IX X XI XII

0

20

40

60

80

100

Current accounts Deposits Securities

Precious metals Other

60

STRUCTURE OF NET REVENUE BY CURRENCY IN 1998

(%)

Source: BNB.

2. Issuing Activity

By the end of 1998 currency in circulation, including currency in vaults of com-mercial banks and outside them, reached BGL 1,845 billion. It rose by BGL 425.2billion (29.9%) compared with 1997. During 1998 currency in circulation grew by20.3 percentage points faster than broad money.

CURRENCY IN CIRCULATION

(outside BNB vaults)

(billion BGL)

Source: BNB.

Currency inCirculation

I II III IV V VI VII VIII IX X XI XII0

20

40

60

80

100

DEM USD

Other currencies Precious metals

I II III IV V VI VII VIII IX X XI XII

0

500

1000

1500

2000

1997 1998

61

Cash balances in the commercial banksí vaults amounted to BGL 103 billionby end-1998, against BGL 105.7 billion by end-1997.

Currency turnover dynamics in 1998 prompted changes in the denominationcomposition of issues. The ëaverageí banknote in circulation by the end of 1998 wasBGL 4,462 against BGL 1,763 by the end of 1997.

By the end of 1998 the number of banknotes in circulation totaled 412 millionagainst 804 million by the end of 1997.

DENOMINATION COMPOSITION IN THE BANKNOTE ISSUE*

* The share of denominations is based on values.

Source: BNB.

On 9 February 1998 the Bulgarian National Bank put into circulation a silvercommemorative coin EURO, St. Sofia Church, nominal value BGL 5,000. On 13February 1998 the BNB put into circulation a CU/Ni commemorative coin, 100Years Bulgarian Telegraph Agency, nominal value BGL 1,000, and on 27 February1998 a silver coin commemorating the 120th anniversary from the Liberation ofBulgaria from the Ottoman Yoke, nominal value BGL 10,000.

On 15 October 1998 the BNB put into circulation a silver commemorativecoin, EURO, Rhyton, nominal value BGL 10,000, and a gold commemorative coin,The Tetraevangelia of Ivan Alexander, nominal value BGL 20,000.

During 1998, central bank operations in Deutschemarks at its cash tills re-peated the 1997 trend of greater purchases by the BNB over sales.

DenominationComposition

CommemorativeCoin Issues

1997 1998

10,000(21.3%)

levs

10 000(19.8%)

levs

5,000 levs(10.9%) 2,000 levs

(5.9%)

1,000(4.2%)

levs

500(3.9%)

levs500(2.5%)

levs

1, 2, 5, 10,20 and 50

(levs

0.3%)

20 and 50(

levs0.1%)

200(2.1%)

levs

100(0.7%)

levs

50,000(50.7%)

levs 50,000(59.6%)

levs

1,000(4.1%)

levs

100 and 200(1.4%)

levs2000

(4.4%)levs

5,000(8.1%)

levs

Reserve CurrencyBought and Sold

at BNB Tills

62

RESERVE CURRENCY BOUGHT AND SOLD

AT BNB TILLS IN 1998

(thousand DEM)

Bought Sold

January 648 17,653February 3,769 1,033March 6,199 540April 6,461 595May 7,551 476June 9,328 531July 15,362 486August 15,870 602September 2,640 1,854October 3,522 883November 1,449 1,093December 658 5,984

Total for the period 73,457 31,730

Source: BNB.

By the end of 1998, gold reserves in BNB vaults totaled 1,031,222 troy ounces.In 1998, gold reserves in the BNB Main Depository continued to increase, due

mostly to gold purchased from domestic producers and gold coins from individuals.By the end of 1998 silver reserves slightly decreased from 1997, a result of

transactions in silver made in the country and abroad.Platinum grew due to contracts concluded with domestic producers.By Resolution No. 126 of 9 September 1998, the BNB Board decided to stop

BNB purchases and sales of silver and platinum from 1999 excepting quantities re-quired for coin minting. The BNB purchased and sold silver during the whole 1998.Purchases of platinum were also effected in 1998. The purchases were insignificantand were to meet the requirements of coin minting.

PRECIOUS METAL STOCK IN THE BNB

(in troy ounces)1

Indicators 31 December 1997 31 December 1998

Gold reserves of the BNB2 1,031,222 1,031,222Circulating precious metals3

Gold 94,490 124,395 Silver 1,227,841 828,507 Platinum 12,328 12,572

1 One troy ounce is equal to 31.10348 g.2 The gold reserves are in bullions, stock market standard.3 The circulating precious metals include gold, silver and platinum of standard type (bullion, strip and officially minted coins).

Source: BNB.

PreciousMetals

63

IV. Financial Markets,

Liquidity, and Relations with

Commercial Banks

64

65

1. The Interbank Money Market

The introduction of a currency board created conditions for financial sectorstabilization, which had a positive impact on the interbank money market both inrespect of traded volumes, and the number of participating financial institutions.Besides the positive effect of currency board adoption on reviving confidence be-tween commercial banks, the interbank market was boosted by the introduction ofa new system of maintaining minimum required reserves. The change in requiredreserves from static into a dynamic value made the interbank money market a ma-jor source of commercial bank current liquidity management.

INTERBANK MONEY MARKET TURNOVER IN 1998

(billion BGL)

Source: BNB.

In nominal terms, interbank market turnover rose 3.2-fold compared with 1997and totaled BGL 5,268.7 billion. The internal market structure was characterized bythe prevalence of deposits: 65%; they were followed by repo agreements: 31%; andoutright sales of government securities: 4%. The sizeable share of deposits reflectedthe fact that they were the most preferred type of operation to meet borrowingneeds within a business day, accounting for 22% of the total volume of traded funds.Outright sales of government securities were the narrowest segment in the interbankmarket because of the high liquidity maintained by banks through most of 1998 andthe lack of alternative instruments for short-term investment.

I II III IV V VI VII VIII IX X XI XII

0

100

200

300

400

500

600

700

Deposits Repo agreements Outright sales of government securities

66

2. The Government Securities Market

The government securities secondary market in 1998 was impacted by severalmajor factors.

In general, trade in government securities issued under MF and BNB Regula-tion No. 5 was dominated by an excess of demand over supply as a result of limitedcirculation issues, on the one hand; and by a liquidity overhang in the banking sys-tem, on the other. These, given insufficient alternative profitable investment instru-ments, encouraged banks to keep securities in their investment portfolio.

Trade in ZUNK bonds denominated in US dollars was more dynamic. In thefirst half of 1998, mainly as a result of the financial stabilization following currencyboard introduction and of Bulgariaís raised credit rating, foreign investor interest inZUNK bonds increased. By the end of June holdings of these bonds accounted fora third of the value of all circulating bonds. Due to excess of demand over supply,the price of these securities rose considerably: in May and June it exceeded 70 centsper USD 1 nominal value. In the second half of the year, as a result of the Asian cri-sis, and subsequently the Russian crisis, foreign investors withdrew. Excessive sup-ply caused a drop in prices which stood at levels below 60 cents for USD 1 nominalvalue in the interbank market, and at 65 cents for smaller transactions with finalcustomers, relating to privatization deals. A serious restructuring among ZUNKbondholders took place, whereby the share of foreign investors considerably de-clined on the account of Bulgarian banks and legal and physical persons. Domesticdemand for these securities remained high due to their relatively high yield andtheir attractiveness as an instrument of payment in privatization deals.

The volume of outright sales in the interbank market for government securitiesissued under BNB Regulation No. 5 increased. These securities made up around20% of bank assets and were one of the major sources of income, where demandexceeded supply.

3. Interest Rates on Commercial Bank

Operations

Commercial bank interest rate policy in 1998 continued to be affected bychanges in the base interest rate, but it was also impacted by other market factors.

The downward trend in the base interest rate set in the second quarter of 1997continued throughout 1998: from 6.79% in December 1997 its average valuedropped to 5.04% in December 1998.

According to the methodology adopted, the base interest rate depends on theyield attained at primary auctions for three-month discount government securities is-sues. The general downward trend in the base rate reflected banksí decreasingyields on direct investment in government debt instruments, which in the last twoyears were banksí main profit-generating investment instrument. The lower yield ongovernment securities, combined with the limited number of issues, posed seriousprofitability problems which banks sought to resolve through their interest ratepolicy.

Interest rates on time deposits in the first half of 1998 followed the trend of thebase rate, though at slower rates. Their average value on a simple annual basis was3.04% in December, or 44% of the base rate, falling in June to 2.71%, or over 52%of base. Low interest rates on lev time deposits intensified a shift to foreign currencysaving among individuals. This urged banks to reassess their policies and in the sec-ond half of the year interest rates rose and stabilized at 3.25%, or 64% of the baseinterest rate at the end of the year.

67

INTERBANK INTEREST RATES AND BASE INTEREST RATE IN 1998

(%)

Source: BNB.

Interest rate lending policy was a major tool to improve bank profitability.Average weighted interest rates on newly extended short-term credits were kept atlevels close to, but most of the time exceeding, the previous yearís level (13.05% inDecember). The high was hit in May: 14.42% per annum, followed by a fall andthen a rise to 12.75% in December. This formed a sizeable positive margin abovethe base interest rate: through most of the year this margin stood at about (or morethan) eight percentage points (the high reported in May was 9.17 percentage pointsover base, and the December figure was 7.71 percentage points over base, against6.25 percentage points in December 1997).

Average interest rates on long-term credits remained at a relatively constantlevel during the first half of the year while in the second half they rose slightly toreach 14.93% in December, against 14.40% in December 1997, resulting in the for-mation of larger positive interest margins above the base interest rate.

Interest rate movements in the interbank market in 1998 faithfully reflecteddemand and supply for and of funds. Sizeable excess reserves helped keep interestrate levels in the interbank market well below base rate. Concurrently the dramati-cally increased volume was coupled with a certain rise in the average interest rates onoperations: from 1.61% at the beginning of the year to approximately 3% in Decem-ber. The trend moved in the opposite direction of base rate movements which led tothe narrowing of the difference between base rate and the average interbank interestrate.

4. The Forex Market and the Exchange Rate

Forex Market

The total volume39 of forex market spot and shorter-term transactions betweendomestic participants totaled DEM 9.43 billion in bank purchases (USD 5.36 bil-lion) and DEM 9.37 billion in bank sales (USD 5.32 billion), i.e. banking sector (in-

I II III IV V VI VII VIII IX X XI XII

0

1

2

3

4

5

6

7

Deposits Repo agreements Base interest rate

An Overview ofthe Forex Market

39 In order to provide a more extensive reporting of the forex market, in the second half of 1998 all bankshad to join those of their number which provided data for the purposes of BNB reporting of the market.Statistically the change in the range of such banks was captured in early 1998 which makes impossible thecomparison of that information with previous yearsí reports, including the report for the first half of 1998.

68

cluding the BNB) purchases and sales to final customers were almost completelybalanced. If the difference from the change in the range of observation is elimi-nated, purchases fell by 8% compared with 1997 and sales rose by 10%. This re-flects lower output of some traditional exporters which were the major source offoreign currency inflow into the banking system, combined with larger forex sales bythe BNB and the Ministry of Finance on foreign debt service.

Commercial bank operations with final customers (companies, budget-sup-ported organizations, finance houses, foreign investors, etc.) comprised the largestmarket sector.

SPOT OPERATIONS WITH CUSTOMERS

million DEM (million USD)

Total for the year Bought Sold Balance

Banks with final customers, including: 4,756.9 (2,702.8) 4,558.2 (2,589.8) 198.7 (113.0) the BNB 166.1 (94.4) 576.3 (327.4) -410.2 (-233.0) commercial banks 4,590.8 (2,608.4) 3,981.9 (2,262.4) 608.9 (346.0)

First half-year (125 days) Banks with final customers, including: 2,260.2 (1,284.2) 2,063.0 (1,172.1) 197.3 (112.1) the BNB 55.0 (31.3) 395.6 (224.8) -340.6 (-193.5) commercial banks 2,205.2 (1,252.9) 1,667.3 (947.4) 537.9 (305.6)

Second half-year (129 days) Banks with final customers, including: 2,496.7 (1,418.6) 2,495.2 (1,417.7) 1.4 (0.9) the BNB 111.1 (63.1) 180.7 (102.7) -69.6 (-39.5) commercial banks 2,385.6 (1,355.5) 2,314.6 (1,315.0) 71.0 (40.4)

Source: BNB.

The total 1998 volume of bank forex purchases from final customers consider-ably exceeded forex sales and consequently banks generated a surplus ofDEM 608.9 million (USD 346 million). The bulk of this surplus (approximately90%) was effected in the first half-year. In the second half of the year sales rose by20% against the first half, while purchases rose 8% alone and consequently thepositive difference between purchases and sales decreased considerably.

The volume of the interbank forex market accounted for DEM 3.9 billion(USD 2.2 billion) in 1998. During the year it was determined to a great extent byforex demand and supply by final customers, which explains its relatively smallervolume in the first half of the year (when forex supplied by banks exceeded demandconsiderably), and respectively its growth in the second half of the year (when thesurplus from these operations declined). Likewise, BNB purchases in the interbankmarket in the first half were much larger than those in the second half, when theBNB participated as a seller, yet with only DEM 18 million.

INTERBANK SPOT MARKET

million DEM (million USD)

Total for the year Bought Sold Balance

Interbank market (BNB excluded) 3,746.2 (2,128.5) 3,907.6 (2,220.2) -* (-*) BNB with commercial banks 980.9 (557.3) 18.0 (10.2) 962.9 (547.1)

First half-year (125 days) Interbank market (BNB excluded) 1,678.6 (953.7) 1,776.8 (1,009.5) -* (-*) BNB with commercial banks 671.9 (381.8) - (-) 671.9 (381.8)

Second half-year (129 days) Interbank market (BNB excluded) 2,067.6 (1,174.8) 2,130.8 (1,210.7) -* (-*) BNB with commercial banks 309.0 (175.5) 18.0 (10.2) 291.0 (165.3)

* Some imperfections in reporting lead to a minimal difference between the Bought and Sold columns, which are identical for operationsbetween fully licensed banks.

Source: BNB.

MarketSectors

69

As in the previous year, the interbank market was the major source of forexsupply to the BNB, and in amounts exceeding net purchases of commercial banksfrom final customers.

Within BNB purchases from final customers, operations at its cash tills had thelargest share. Book-entry purchases from companies, budget entities and state fundswhich maintained accounts with the BNB continued, though in limited amountscompared with previous years.

The total volume of BNB purchases in 1998 accounted for DEM 1,147 million,or 2.3 times less than in 1997.

BNB SPOT TRANSACTIONS

million DEM (million USD)

Total for the year Bought Sold Balance

TOTAL FOR THE YEAR 1,147.0 (651.7) 594.3 (337.7) 552.7 (314.0) BNB with commercial banks 980.9 (557.3) 18.0 (10.2) 962.9 (547.1) BNB with customers, including: 166.1 (94.4) 576.3 (327.5) -410.2 (-233.1) with companies 33.4 (19.0) - (-) 33.4 (19.0) with budget organizations 29.3 (16.6) 50.6 (28.8) -21.3 (-12.2) with MF for foreign debt - (-) 458.3 (260.4) -458.3 (-260.4) with state funds 28.8 (16.4) 32.8 (18.6) -4.0 (-2.2) with Privatization Agency 0.4 (0.2) 0.0 (0.0) 0.4 (0.2) other 1.1 (0.6) 2.9 (1.6) -1.8 (-1.0) cash operations at tills 73.5 (41.8) 31.7 (18.0) 41.8 (23.8)

Source: BNB.

The BNB sold forex predominantly to the Ministry of Finance for foreign debtpayments, and in much greater amounts (35%) than in the previous year. BNB forexsales to budget-supported entities and funds also rose from the preceding year, bymore than 70%. Compared with 1997, net purchases of banknotes at cash tills de-clined.

Ultimately, despite considerably lower purchases and higher sales than in 1997,the BNB closed 1998 as a net buyer with DEM 552 million.

Changes in the market structure of currencies traded against the lev matchedthose in 1997, consistent with the introduction of the currency board. The share ofthe US dollar accounted for 52.5%, that of the Deutschemark 42.6%. In the firsthalf of 1997 prior to the introduction of the Deutschemark as a reserve currency,these shares were 81.2% and 14.7% respectively. In commercial bank transactionsthe share of the US dollar lagged behind the Deutschemark: 48.5% and 49.4% re-spectively (against 91.2% and 7.6% respectively in the first half of 1997). Whencommercial bank spot transactions with the BNB are included, the share of the USdollar in the interbank structure breaks down at 38.6% for the US dollar and 59.7%for the Deutschemark (against 79.3% and 19.1% in the first half of 1997). The USdollar occupied a more sizable share in bank transactions (including on accountsand at BNB tills) with customers. However, an overall replacement of the US dol-lar by the Deutschemark also occurred in this segment of the market: in bank pur-chases the US dollar accounted for 66.9% and 23.7% for the Deutschemark (against80% and 12.7% in the first half of 1997), and in bank sales the US dollar accountedfor 55% and the Deutschemark: for 38.5% (against 87.3% and 7.7% in the first halfof 1997).

Exchange Rate

The policy adopted with the introduction of the currency board had crucialeffect in determining market exchange rates: a fixed exchange rate of the lev to theDeutschemark and announcement of reference rates of the lev to other currencieson the basis of their rates to the Deutschemark in international markets. The ex-change rate of the lev followed the international markets movements. During thefirst half of 1998 the BGL/USD exchange rate fell slightly (0.9%), while in the sec-

BNBOperations

MarketStructure by

Currency

70

ond half of 1998 this trend was reversed and by end-1998 the lev appreciatedagainst the US dollar by 7% compared with end-1997.

BGL/USD CENTRAL EXCHANGE RATE IN 1998

(BGL/1 USD)

Source: BNB.

Under these conditions, in most months of the year market rates hoveredaround or slightly under officially announced rates. Unlimited BNB participation inthe forex market at fixed spot rates of the Deutschemark (bid rate at BGL 995 andoffer rate at BGL 1,000) had an additional stabilizing effect. The market was underpressure in January and early February when quotations of noncash spot transac-tions reached fixed BNB quotations and those of exchange bureaux even exceededthem: the offer rate exceeded BGL 1,000. As a result the BNB appeared to becomea more favorable seller rather than Deutschemarks buyer. Later, the former ratioswere restored.

5. Commercial Bank Reserves

During 1998 two different systems of minimum required reserve setting andaccounting were used.

Until March minimum required reserves were regulated on the 15th of eachmonth. The level of required reserves was formed as a static value on the basis ofend-of-month balance-sheet data and was obligatory for maintenance by banks oneach day of the following month.

This system displayed serious setbacks. First, there was a significant gap be-tween the period of setting required reserves and the period of maintaining these re-serves. Second, the fact that minimum required reserves are set on the basis of thedeposit base on particular date (the last date of the month) exposed minimum re-quired reserves not only to occasional factors but also allowed banks to use variousmethods to decrease their deposit base on this day (by increasing cash balances, andshort-term repo agreements with clients) and correspondingly the amount of mini-mum required reserves. Banksí access to required reserves was limited to 15%, theremaining 85% being blocked in bank current accounts with the BNB. This led tooccasional queues in settlement payments, mainly reflecting inadequate liquiditymanagement, delayed payments or unexpected expenses for individual commercialbanks.

1550

1600

1650

1700

1750

1800

1850

1900

I II III IV V VI VII VIII IX X XI XII

71

ATTRACTED RESOURCES FROM COMMERCIAL BANKS AND

MINIMUM REQUIRED RESERVES

(billion BGL)

Source: BNB.

In April, Regulation No. 21 introduced a new system of organization for mini-mum required reserves. Minimum required reserves are set on the basis of the av-erage daily amount of the deposit base for a base period corresponding to one cal-endar month. Reserve accounting is effected for the reserve maintenance periodwhich begins three days after the beginning of the base period and is of similarduration. As a result the setbacks of the old system were eliminated: the gap be-tween the base period and the reserve maintenance period was decreased to threedays and reserve formation on an average daily basis eliminated occasional factors.The reserve percentage was retained at 11% of the deposit base. Some benefits ofthe old system were preserved: 605 of vault cash and ATM terminals are exemptfrom the minimum reserve requirement and banks are permitted to maintain up to100% of required minimum reserves on attracted funds in foreign currency. Bankshave unlimited access to current use of reserve accounts with the BNB in levs andforeign currency. Accounting is effected on an average daily basis as a ratio betweenactually maintained reserves during the maintenance period and calculated requiredreserves as a percentage of the average daily amount of the deposit base during thebase period. This encouraged banks to improve their current and monthly liquidityand favored interbank market development.

The overall change in attracted funds, and hence in minimum required re-serves is not significant due to the financial stabilization and lack of dramaticchanges in the base interest rate after 1997. Some fluctuation in the maintained re-serve assets was evident in the maintenance periods, reflecting banksí liquidity man-agement policies and seasonal factors associated with movements of monetary flowsfrom and to the general government budget. Maximum deviations of these assetswithin particular reserve maintenance periods varied between 3.08% in May and11.13% in December, comprising 38.74% for the lev equivalent of foreign currencyreserves and 27.16% for lev reserves. Despite relative monthly stability in the lev toforeign currency proportion (on an average daily basis), on particular days banksused foreign currency in financial markets and covered their foreign currency de-posits with lev reserves. Effectively deposited foreign currency continued to movebetween 41.16% and 47.83% of minimum required reserves on attracted funds inforeign currency, and the share of deposited Deutschemarks is the biggest.

1500

2000

2500

3000

XII.1997 III.1998 VI.1998 IX.1998 XII.1998

200

250

300

350

Attracted resources in levs (left scale)

Attracted forex resources left scale( )

Minimum required reservesin levs (right scale)

Minimum required reservesin foreign currency (right scale)

72

Banks are subject to penalties for noncompliance with minimum required re-serves at the end of the maintenance period as well as for use of funds on currentaccounts with the BNB in excess of 50% on each particular day.

Generally banks did not face serious difficulties in maintaining minimum re-quired reserves during 1998. Following the introduction of the new system, only afew banks failed to comply with minimum reserve requirements due mostly to inad-equate liquidity planning. In case of serious failures, the Banking Department andBanking Supervision Department undertook joint measures and in most cases thesebanks returned to normal operation. Noncomplying banks were sanctioned in accor-dance with Regulation No. 21.

The efficiency of the new system of minimum required reserve accounting andbanksí flexible policies found reflection in excess reserves on current accounts withthe BNB where a steady downward trend evolved toward negative balances in themiddle of the maintenance period, and a maximum level at the end of the mainte-nance period to attain the level of minimum required reserves when banks intensifytheir activity. Queues in payments occurred only occasionally during 1998 with theexception of the Credit Bank which experienced a severe liquidity crisis and waslater declared insolvent.

6. Payment System and Settlement

In 1998 bankrupt banks continued closing branches directly participating in thepayment system. The number of closed input points considerably exceeded the num-ber of newly opened input points; as a result at the end of the first half-year thesefell to 744 against 831 at end-1997. During the second half-year bankrupt bankswere excluded from the system of interbank settlements by resolution of the BNBBoard. As a result the number of active participants in the payment process fell to621.

During the reporting year 11,951,149 interbank settlements were clearedthrough the BISERA electronic interbank transfers system, including 5,517,713 inthe first half of 1998 and 6,433,436 in its second half. This indicates an increase of17.4% compared with 1997. The total amount of settlements over the reporting pe-riod was BGL 38,587 billion, including BGL 17,766 billion in the first half-year (av-erage daily BGL 132.6 billion) and BGL 20,821 in the second half-year (averagedaily BGL 162.7 billion). The faster growth of settlements both in number (16.6%)and amount (17.2%) effected through BISERA in the second quarter of 1998 re-flected continuous stabilization of the banking sector, resulting in a decrease in cashpayments between economic agents, a practice typical of the periods of liquiditycrisis. Along with the increased number and amount of settlements effected throughBISERA, intrabank transfers between branches of bigger banks increased signifi-cantly.

7. Claims on Commercial Banks

In February 1998 the BNB Board adopted Regulation No. 6 on extending col-lateralized lev loans to banks. The Regulation establishes clearly the terms for ex-tending loans to banks by the BNB as lender of last resort. These terms reflected thespecificity of the central bank operation under a currency board: the BNB may re-finance banks in case of emergence of a liquidity risk for the whole banking system.Generally, the banking system reported a significant excess in liquidity during 1998.Despite the crisis and subsequent insolvency of the Credit Bank, no need for otherrefinancing occurred over 1998.

Under these conditions BNB efforts were intended to seek possibilities to re-duce debts to itself accumulated in previous years. This was complicated by the factthat debts were accumulated by eleven banks, ten of which are in insolvency and

73

one in liquidation, and by a commercial bank consortium, part of which is also in in-solvency. The situation was additionally worsened due to the lack of lists of col-lected claims by assignees in bankruptcy approved by Court under Article 692 of theLaw on Commerce, an indispensable condition for the distribution of the mass of in-solvency.

In 1998 principal and interest repayments of BGL 27.4 billion were collectedon secured loans in accordance with the schemes agreed with the assignees in bank-ruptcy of debtor banks and approved by Court. As a result by the end of 1998 BNBclaims on commercial banks decreased by BGL 22.8 billion from end-1997, reach-ing BGL 141.1 billion. Of this, lev claims totaled BGL 52.3 billion (37.07%), andthe lev equivalent of foreign currency claims amounted to BGL 88.8 billion(62.93%).

The bulk of claims, totaling BGL 108.7 billion (77%) are unsecured. Securedclaims totaled BGL 32.4 billion (33%).

Interest accrued by the end of 1998 amounted to BGL 145 billion.All BNB claims are reported as overdue credits. Foreign currency claims, un-

secured lev claims and interest accrued prior to the insolvency of debtor banks areprovisioned. Only claims collateralized by government securities and interest ac-crued on off-balance sheet items after insolvency remained unprovisioned.

74

75

V. The Banking Sector and Banking

Supervision

76

77

1. Banking Sector State, Structure

and Major Trends40

A key feature of bank activity in 1998 was the pursuit of financial stabilizationand improved capital adequacy for commercial banks. Developments in generaleconomic conditions in 1998 caused significant changes in the structure and compo-sition of reported incomes. While in 1997 their magnitude was strongly affected byunpredictable events and extremely volatile financial conditions, in the reportingperiod the fixed exchange rate of the lev to the Deutschemark precluded formationof large gains on valuation adjustments of an accounting nature.

The stable interest rate level ensured a relatively constant margin on commer-cial loans, but helped lower yield on government securities, the most commonlyused investment instrument over the last two years. Except for the August to Octo-ber 1998 period, developments in the international markets did not affect dramati-cally the price of Bulgarian debt, which in turn precluded sizeable income formationfrom revaluations. Consequently net income from interest, fees and commissionsand income from securities trading proved to be the major sources of self-financingand capital formation.

Higher income from financial operations reflects a wider range of bank ser-vices offered and improved efficiency of operating bank activities. At the same timefinancial institutions faced a number of difficulties. The worsened position of anumber of enterprises, mainly in the public sector, combined with tentative develop-ment of some of the newly privatized companies limited the range of creditworthycustomers. An additional problem arose for a part of the banking system from ac-quisitions of tangible assets and securities serving as collateral on nonperformingcredits. Domestic market conditions do not provide for the sale of chattels and realestate at acceptable prices in the short term, while the faltering and rather symbolicdevelopment of stock trading forced banks to hold large volumes of low liquid cor-porate securities in their portfolios for long periods.

During the reporting period the banking system faced two major challenges:the introduction of international accounting standards, and more rigorous supervi-sion and capital requirements. In these conditions banks had to operate under newrules of transparency and publicity and had little room for manipulating their finan-cial position parameters. These changes, underpinned by decisive banking supervi-sion actions, reduced violations to a minimum and created improved conditions forcontrolling risks in the system.

By operating in a new financial, accounting and supervisory environment andfollowing a pattern of conservative behavior, banks proved quite prepared to facethe summer and early autumn crisis in the international financial markets: they hadhealthy shares of high-liquid assets, good capital positions and a flow of customers.Banks were able to cope with the devaluation of some of their assets thanks to theirpositive results at the beginning of the year and adequately high capital positions.The system incurred losses of BGL 80 billion in net worth between June and Sep-tember 1998 but was able to restore its positions in the last quarter of the year.Commercial banks, not without consistent banking supervision actions, took steps to

40 Data on the banking system, included in the BNB 1998 Annual Report, is not final.

78

Structure ofCommercialBank Assets

1997 1998

Group I(75%)

Group II(17%)

Group III(8%)

Group I(70.4%)

Group II(19%)

Group III(10.6%)

enhance control of credit and currency risks and had to look for solutions to provideadditional capital funds. As a result of the scarcity of capital funds, in combinationwith still insufficient sources of income, some banks will be confronted with the di-lemma of whether to retain and restrict activity or to raise capital potential. Thischoice will determine to a great extent their behavior in 1999 and their ability toretain market share, it may even determine their survival.

At the end of 1998 the Bulgarian banking sector comprised 34 banks. Duringthe reporting period the BTIB merged with Credit Bank and the Turkish bankZiraat Bank was licensed to conduct inland bank operations.

For the purposes of the Banking Supervision Department, financial institutionsare classified into groups according to system significance, asset size and the type ofshareholder capital. Based on these criteria banks are divided into the followingthree major groups:

Group I includes banks of systemic significance, with the largest balance-sheetasset size. It includes seven banks making up 70.4% of total banking system assets.In 1998 the Bulgarian Post Bank was privatized by foreign investors and the UnitedBulgarian Bank has majority foreign shareholder capital. The legal status of anotherbig bank within the group was modified. The SSB was transformed into a commer-cial bank and began operating in compliance with the Law on Banks and otherregulatory acts on its implementation.

Group II includes 17 small banks with majority private shareholder capital.The Municipal Bank is included in this group. Medium and small-sized banks com-mand 19% of banking system assets.

Group III includes ten subsidiaries and branches of foreign banks. The groupmakes up 10.6% of banking system assets.

Change in Banking System Structure

During the year Group I and Group II banks continued to maintain largeshares in total banking system balance-sheet assets.

ASSETS BY BANK GROUP

Source: BNB.

The balance-sheet value of the banking system grew by approximately 3.2%and as of 31 December 1998 totaled BGL 7,595 billion. Within the structure of as-sets, credits to the nonfinancial sector of the economy grew most, by 65%. In 1998

79

they totaled BGL 724 billion, their share in total assets growing from 15% at end-1997 to 24% in 1998. Claims on banks and other financial institutions retained thehighest share in assets. As of end-1998 claims on banks and other financial institu-tions accounted for 33%, an increase of 2% compared with the previous year. At thesame time claims on interest and other assets declined: by 60% (BGL 534 billion),their share contracting from 12% to 5%. A positive change occurred in earning as-sets which grew by BGL 842 billion to BGL 6,087 billion, their balance-sheet weightgrowing to 80%.

Total assets of Group I banks of systemic significance declined by approxi-mately 4% compared with 1997. The largest decline occurred in the Claims on In-terest and Other Assets item: 66%, reflecting settlement and write-off of outstand-ing amounts on sovereign debt, clearing and intergovernmental agreements fromBulbank balance sheet as negotiated with the Ministry of Finance. Earning assets ofGroup I banks grew by 8%, and their share in assets rose by nine percentage pointsto 80%. Credits displayed the strongest dynamics, growing by BGL 450 billion inabsolute terms. This is mainly attributable to one bankís lending activity within thegroup, whose net growth in the portfolio as a result of extended loans, mostly con-sumer ones, accounted for 42% of overall growth in the group. Other banks withinthe group contributed to 58% of total growth. Within Group I banks, a trendemerged toward an increase in claims on private companies at the expense of claimson state companies which declined or remained relatively constant. Credits extendedto individuals, households and nonprofit organizations increased in absolute terms.The position with regard to private sector credits was similar.

ASSET STRUCTURE

Source: BNB.

The balance-sheet value of medium and small-sized banks rose by BGL 238billion (20%), mainly due to their growing deposit base and equity. All banks whichfailed to meet the required BGL 10 billion in own funds under the Law on Banksbelonged to this group and therefore banking supervision obliged them to take mea-sures to raise their capital by July 1998 in compliance with the requirements of theLaw on Banks. Actually paid-up capital grew by approximately BGL 49 billion dueto installments made by the shareholders of four banks within the group, and over70% of combined growth in deposits was reported by one bank: BGL 104 billion, at-tributable to accumulated funds from international financial institutions and sizeablefunds on an extrabudgetary account.

1997 1998

Vault cash andcurrent accountbalances with

the BNB (12.8%)

Vault cash andcurrent accountbalances with

the BNB (10.4%)

Securities in tradingportfolio (20.6%)

Securities in tradingportfolio (16.7%)

Securities ininvestment

portfolio (3.9%)

Securities ininvestment

portfolio (6.2%)

Assets fromresale (0.2%)

Assets fromresale (0.3%)

Claims oninterest andother assets

(12.1%)

Claims oninterest andother assets

(4.7%)

Credits to nonfinancialinstitutions and other

clients (15.2%)

Credits to nonfinancialinstitutions and other

clients (24.3%)

Fixed assets(3.6%)

Fixed assets(4.5%)

Claims on banks and otherfinancial institutions (31.5%) Claims on banks and other

financial institutions (32.9%)

80

Structure ofLiabilities

1997 1998

Interest payments andother liabilities (12.3%)

Interest payments andother liabilities %)(10.7

Other attractedresources (5.8%) Subordinated

debt %)(0.0

Subordinateddebt (0.0%)

Other attractedresources %)(4

Deposits nonfinancialinstitutions and other clients

(71

of

%)

Deposits nonfinancialinstitutions and other clients

%)

of

(76.3

Deposits of banksand other finaof

Deposits banksand other financialinstitutions %)

of

(9.1

The bulk of attracted funds within the group was invested in earning assetswhich grew by over BGL 330 billion (38%). Of these, total credits to nonfinancialinstitutions grew most: by BGL 140 billion (56%). Four banks contributed most sig-nificantly to this growth, their overall growth in credits to nonfinancial institutionsaccounting for 76% of total growth within the group. Extended credits to privateenterprises had the largest share. Compared with 1997, these increased by approxi-mately BGL 130 billion (66%). Net growth in credit portfolios is ascribable both tonewly extended loans and improved quality of bank claims. The allocation of fundsin more lucrative investments caused a 25% decline in cash balances within thegroup.

The balance-sheet value of subsidiaries and branches of foreign banks withinGroup III grew by 39%: the highest rate among the three groups. This combinedwith credit growth of over BGL 133 billion (74%), mainly accounted for by threebanks within the group (BGL 102 billion). A positive, though less pronounced dy-namics developed in claims on banks and other financial institutions, growing byBGL 91 billion or 35%. Decreases occurred in government securities portfolio andcash balances. Overall, earning assets within the group rose by BGL 217 billion toBGL 695 billion, their share in assets growing from 82% in 1997 to 86% in 1998.

Total banking system liabilities declined by some 0.1% compared with Decem-ber 1997. The trend is negative only in Group I, consistent with the aforementionedsettlements with the Ministry of Finance. In the consolidated balance sheet ofGroup I banks this effect reflected on the following items: Deposits from Banks andOther Financial Institutions, Other Attracted Funds and Interest Payments and OtherLiabilities. If this effect is disregarded, deposits attracted from financial institutionsstood close to 1997 levels, resources from nonfinancial institutions increased and in-terest payments and other liabilities declined. Trends in the other two groups arepositive. Group III attracted resources grew by 34% and Group II ones by 16%.Growth in deposits attracted from nonfinancial institutions was reported in all threegroups, the largest growth in Group III banks: 42% (BGL 138 billion). Growth inGroup I banks was 5% (BGL 178 billion) and 2% (BGL 18 billion) in Group IIbanks.

LIABILITY STRUCTURE

Source: BNB.

81

Consolidated Indicators of Banking System StateBased on the Early Warning System

In mid-1998 the Banking Supervision Department designed and applied theEarly Warning System aimed to identify potential risks to the state of commercialbanks. By means of this system a set of parameters is measured in static and dy-namic terms to highlight more precisely developing trends in assets and liabilities,risk concentration, and sources of income. A set of CAEL indicators correspondingto assigned ratings to commercial banks under the five-level CAMEL rating scaleform an integral part of the system.

On the basis of the Early Warning System the following consolidated indicatorsare given below:

(%)

XII.1997 XII.1998

Capital/reserves ratio 10.77 12.94Percentage share of risk-weighted assets 29.16 34.71Return on assets (ROA) 5.15 5.32Return on equity (ROE) 47.81 39.59Net interest margin 3.05 4.48Net profit/earning assets ratio -9.72 8.85Credits/deposits ratio 26.96 34.15

Source: BNB.

2. Banking Supervision

Regulations

As of 31 December 1998 the capital base of commercial banks totaledBGL 1.043 billion, a 65% increase on the previous reporting period. Total capitaladequacy grew by over eight percentage points and exceeded considerably the re-quired minimum under BNB Regulation No. 8.

CAPITAL RATIOS FOR THE TOTAL BANKING SYSTEM AND BY BANK GROUP

(%)

Commercial Total capital Primary capital Degree ofbanks adequacy adequacy asset cover

Group I 40.80 31.72 13.24Group II 32.87 27.76 16.46Group III 25.46 20.77 11.55

Total 37.25 29.70 13.74

Source: BNB.

CapitalAdequacy

(Solvency)

82

Credit Risk andProvisioning of

Risk Assets

CAPITAL BASE AND PRIMARY CAPITAL

(billion BGL)

Note: Data on Group III banks includes only BNP ≠ Dresdnerbank, Raiffeisenbank, Bulgarian-American Credit Bankand T. C. Ziraat Bank which are subsidiaries. All other banks in the group are branches and hence do not form capital.

Source: BNB.

The analysis of capital adequacy as at the yearís end indicates that the key fac-tors for improved capital adequacy ratios are the adopted policy of directing finan-cial resources in low-risk investments (claims on the government, fully securedclaims against government securities, and deposits abroad), maintaining the highshare of cash resources, and retaining credit portfolio quality.

The capital of Group I banks grew most significantly in absolute terms: byBGL 235 billion, attributable both to equity growth of BGL 172 billion and allo-cated reserves. Retained profits and the revaluation of fixed tangible assets at year-end also contributed to this.

The most significant growth in relative terms was reported by Group II andGroup III banks: BGL 120 billion and BGL 172 billion respectively. For mediumand small-sized banks this is due to paid-up equity capital by shareholders and aconsiderable increase in the financial result which grew by approximately BGL 15billion (129%). Capital base growth in Group III banks is attributable to an overBGL 40 billion increase in equity capital of the four foreign banks operating in Bul-garia.

In all three groups of banks the degree of asset risk tended to increase. Thistrend reflects a higher share of risk-weighted assets in balance sheets due to largercredit portfolios.

In early 1998 two banks had a capital adequacy ratio below 8% and severalothers reported capital base below the required BGL 10 billion. Measures and ac-tions imposed by the BNB, combined with bank management and shareholder ef-forts, made it possible to achieve high capital adequacy ratios in the system. Despitea cautious increase in the risk component of assets and the adopted conservativeapproach to their management, insufficiency of own funds in some banks may im-pede expansion of their activities.

Compared with end-1997, reported total risk exposures increased by BGL 650billion (12.5%). Nevertheless, a trend toward retaining asset quality emerged. Totalsystem standard exposures accounted for 83.3% at the end of 1997, growing to87.3% at the end of 1998. Concurrently the loss dropped from 10.6% to 6.3%.

During the period under review banks adhered to the practice of a cautiousselection of borrowers and imposed strict requirements on their transactions

Group I Group II

TotalGroup III

0

200

400

600

800

1000

1200

Capital base Primary capital Primary capitalCapital base

1997 1997 1998 1998

83

adopted after the crisis. Financial institutions adhered to the principle of prudentialbanking and in a number of cases reassigned standard exposures to a higher-riskgroup to avoid potential losses. In 1998 unsecured lending practically stopped andcollateral requirements considerably exceeded the amount of extended credits.

Consumer and house-building credits grew most significantly in 1998. In thesecond half of the year some lending institutions offered new services which markedthe beginning of competition, though tentative, in this market segment. There arebanks in the system with portfolios unburdened by credits classified as uncollectible.This is consistent with the pursuit of a conservative lending policy oriented at smallin number prime rate customers.

STRUCTURE OF RISK EXPOSURES

Source: BNB.

In 1998 stricter compliance with the provisions of BNB Regulation No. 7 con-tinued. Total banking system big exposures exceeded 1.13 times the capital base in1998 (1.39 in 1997) and were far below the admissible eight times. Financial insti-tutions in Group III reported the most significant decrease in this indicator: 43%.Nevertheless, the excess in this group of banks remained the highest: 4.81 times.Group II medium and small banks retained the levels of this coefficient at the pre-vious yearís levels and within Group I banks there was a slight reduction: 0.28%. Asof 31 December 1998 only one bank exceeded the eight-fold limit underRegulation No. 7 on big exposures to capital base by 0.93 percentage points.

Risk aversion in 1998 and preference for safer asset operations reduced thepotential for income generation. Nevertheless, net interest margin (calculated as aproportion between net interest income for the period and average weighted assets)rose from 3.05% in 1997 to 4.48% in 1998. This is attributable to improved qualityof interest-bearing assets. However, to avoid potential losses, commercial banksmaintained a considerable portion of their assets in safer, low-income assets.

Net income from earning assets (the proportion between net profit from earn-ing assets and average weighted assets) also rose: from -9.72% at the end of 1997 to8.85% as of 31 December 1998.

The trend of covering system operating expenses with net income from interest,commissions and fees, continued.

Despite relatively satisfactory 1998 profitability ratios, the system did not takeactions to reduce interest spread and operating expenses.

1997 1998

Standard(83.3%)

Substandard(2%)

Doubtful(1.5%)

Loss(10.6%)

Watch(2.7%)

Standard(87.3%)

Substandard(2.2%)

Doubtful(0.6%)

Loss(6.3%)Watch

(3.5%)

Big Credits

Profitability

84

OpenForeign

CurrencyPositions

Throughout 1998 primary and secondary liquidity was high. As of 31 Decem-ber 1998 total system primary liquidity was 17.3% and secondary liquidity 57.4%.The information based on reports under BNB Regulation No. 11 indicates satisfac-tory levels of the share of high-liquid assets and net cumulative inflow into the sys-tem as a whole. Some banks reported a net cumulative cash outflow but for most fi-nancial institutions liquid funds proved sufficient to cover cash outflows. A seriousnegative mismatch between cash inflows and outflows occurred in the last months of1998 at Credit Bank. Liquidity deficiencies and limited capital reserves ended withthe revocation of this bankís license in early 1999.

Noncompliances with Regulation No. 4, typical of early 1998, diminished inincidence and magnitude at year-end. While at the beginning of the reporting periodalmost half of the banks in the system violated the prescribed limits, at the end of1998 deviation from maximum permissible limits was reported by a small number offinancial institutions. In order to achieve the prescribed 60% limit of the open for-eign currency position to own funds, banks moved to converting USD-denominatedassets into DEM-denominated assets. In particular cases compliance with the Regu-lation was coupled with forex purchases and sales.

Major Supervisory Measures Imposed bythe Banking Supervision Department in 1998

Stricter performance requirements from the Banking Supervision Departmentand the correspondingly greater powers provided by the Law on the BNB led to anextensive use of supervisory measures and actions intended to bring banking activ-ity into line with legislative requirements. The supervisory measures imposed re-sulted from examinations carried out by the Inspections Directorate, the Special Su-pervision Directorate, as well as systematic supervision by the Off-site Supervisionand Analyses Directorate.

During 1998 the Inspections Directorate conducted 18 full examinations, in-cluding four banks of systemic importance, eleven small and medium-scale banksand two branches of foreign banks. In compliance with the newly established super-visory practice, at the end of each examination ratings under the CAMELS systemwere determined, besides traditional assessments, findings and recommendations.

In addition to full examinations, a number of target examinations were con-ducted on the compliance of banksí own funds with minimum required capital andother current problems related to commercial bank financial performance.

Major findings of on-site examinations reflect both objective difficulties andsubjective errors. Despite compliance by all banks with capital adequacy require-ments, a genuine risk of capital inadequacy exists. This may be prompted by theneed for additional provisions, and the assets for resale acquired against bad loansin the balance sheets of some banks; the latter do not generate income and arestrongly impacted by the existing market risk. Due to the worsened structure of in-come-generating assets some banks rely only on occasional ad hoc revenues whichare very often insufficient to cover their current expenditure. These circumstancesdecrease the role of financial performance as an internal source and reserve forcommercial bank capital growth.

Examination results suggest that lending management needs to be improved.The work of lending committees as specialized bodies for inspection, assessment,classification and provisioning of risk exposures is insufficiently efficient. Moreover,some banks have not yet established lending committees. The lack of comprehen-sive and up-to-date trading information have led to instances where changes in debt-orsí financial performance and deterioration of their major economic indicatorshave failed to be taken into account in a timely fashion. As a result, recommenda-tions for credit reclassification have been delayed. There are also cases where secu-rities on credits were wrongly reported as highly liquid, thus decreasing the totalamount of risk assets. Omissions in the work of bank managements were also found.There are no clear improvement strategies for the current inefficient organizational

Liquidity

85

structures of banks, and no long-term development business plans. Due to inad-equate software used by some banks, the management was not provided with con-solidated and reliable information. This disturbs internal communication and im-pedes the establishment of reliable systems for early forecasting, identification, as-sessment and management of bank risk. Formal breaches of the legislative frame-work and supervisory regulations were also found to occur regularly.

Banksí internal control is ineffective, insufficiently independent, and assessescurrent and potential risk operations inadequately. The need for additional occupa-tional training has not been taken into account, and responsibilities have not beenclearly defined at all levels. The reasons for personnel fluctuations have not beenanalyzed.

In 1998 the Special Supervision Directorate carried out a number of examina-tions of commercial banks, nonbank financial institutions and banks in bankruptcy.

Target examinations associated with the structure of shareholdersí capital, tradein government securities and ZUNK bonds were carried out in 15 commercialbanks. Eight examinations were carried out jointly with the Securities and Stock Ex-changes Commission concerning the activity of investment intermediaries. Uponrequest by the Financial Intelligence Service Office at the Ministry of Finance, ex-aminations of four commercial banks were carried out upon information regardingdubious operations, in compliance with the Law on Money Laundering and Preven-tion of Money Laundering Through the Banking System.

Examination findings included: breaches of provisions of Article 179 of theLaw on Commerce on keeping shareholdersí registers; violation of ß 4 of the Lawon Banks; violation of the provisions of Article 3 of the Regulation on terms andprocedure for the acquisition and redemption of long-term government bonds issuedunder structural reform; breaches of the Law on the Accountancy and the Law onSecurities, Stock Exchanges and Investment Companies. To remove these violations,meetings with managements were held and warning letters were sent.

On the basis of protocols on joint examinations with the Securities and StockExchanges Commission, five financial institutions were sanctioned for improperactivity as investment intermediaries.

During 1998 supervision on nonbank financial institutions included the follow-ing activities: 20 finance houses were granted licenses to effect noncash purchaseand sale of foreign currency pursuant to ß 7 of the Law on Banks. Sixty-seven ex-change bureaux were authorized to conduct cash transactions in foreign currency inaccordance with Article 18 of the Law on Transactions in Foreign Exchange Valu-ables and Currency Control. The number of operational finance houses by 31 De-cember 1998 was 36. Exchange bureaux working with customers numbered 1,025.

During 1998 forty-two examinations were carried out, mostly of finance houses.Examination findings included, inter alia, violations of Article 3 of the Regulationon the export and import of foreign exchange valuables, the conduct of discount andguaranty transactions, trust management of funds; violations of ß 7 of the Law onBanks, and breaches of the Law on the Accountancy. The Prosecutorís Office andtax authorities were notified of findings deemed to constitute a chargeable offence.

As a result of on-site target examinations and documentary inspections, theBNB Board revoked the licenses to conduct transactions in foreign instruments ofpayments of 192 nonbank financial institutions.

Joint examinations of four insolvent commercial banks were carried out by theBanking Supervision Department and the Government Financial Control Office.Examinations established violations of Articles 652 and 653 of the Law on Com-merce on the inventory of chattels and real estate, cash, valuables, securities andother bank claims on third parties; accountancy was disturbed; assignees in bank-ruptcy violated Article 660, para. 1 of the Law on Commerce concerning expendi-tures associated with bank management and the preservation of its property. Exami-nation findings included also violations of Article 84, para. 4 of the Law on Bankson the timely submission of assigneesí in bankruptcy reports to the central bank, aswell as violations of the Law on Commerce, the Law on the State Protection of De-posits and Accounts with Commercial Banks in Respect Whereof the Bulgarian Na-

86

tional Bank Has Petitioned the Institution of Bankruptcy Proceedings and the Lawon Banks. The Banking Supervision Department and the Government Control Of-fice jointly prepared recommendations for ending the violations.

Active measures by the Banking Supervision Department helped intensify anddiversify the measures used to prevent and eradicate violations of supervisory re-quirements and overcome their consequences. Informal measures were paid specialattention: these included, inter alia, meetings and discussions with bank manage-ments and major shareholders, written recommendations, requirements for detailedplans for compliance with banking regulations and the eradication of violations. Inthe second half of 1998, 13 legal and administrative proceedings for breaches of theLaw on Banks and its statutory instruments were instituted against executive direc-tors of commercial banks or against the commercial banks themselves. Some of theproceedings resulted in written warnings pursuant to Article 28 of the Law on Ad-ministrative Misdemeanors and Penalties. Verdicts in the remaining proceedings arepending.

Major supervisory measures imposed by the Banking Supervision Departmentin 1998 are:

1. Following two written warning letters for normalization of banking activityand agreement between major shareholders, conservators were appointed at the St.Nicholas International Orthodox Bank (later renamed Neftinvestbank). Within threemonths the conservators, assisted by the Banking Supervision Department, had over-come the bankís difficulties, convened a general shareholdersí meeting, raised thebankís capital, and eliminated the threat of the bankís financial disruption.

2. Following an analysis of commercial bank capital base and banksí ability toattain compliance with BNB Regulation No. 8 by 30 June 1998, in April 14 commer-cial banks were required to prepare plans for the attainment of the minimum re-quired capital of BGL 10 billion. Almost all banks met the requirements within theset term. However, Credit Express Bank (renamed Tokuda Credit Express Bank)failed to meet the requirements. The problem was solved by the inclusion of a for-eign investor in the bank. The same problem was found at the Bulgarian Trade andIndustrial Bank, which merged into Credit Bank in August 1998.

3. Due to poor financial performance a written warning was sent to the BalkanUniversal Bank, calling for an immediate capital increase. After depositing of re-quired amounts by the bankís major shareholder, the bank attained the requiredcapital base.

4. With the enactment of the Law on Transformation of the State Savings Bankinto a Commercial Bank, a memorandum of understanding was concluded on 30July 1998. This included specific supervisory constraints on the transformation term,and additional supervisory measures for this institution. As a result of the memoran-dum the bank is being transformed smoothly.

5. Credit Express Bank (renamed Tokuda Credit Express Bank) was sent writ-ten warnings and sanctioned under Article 13 of BNB Regulation No. 21 due to non-compliance with bank license regarding the right to open bank accounts abroad, andminimum required reserves with the BNB. Subsequently, the Chief Executive Direc-tor was released by a resolution of the bankís Supervisory Board.

6. Due to noncompliance with banking regulations and requirements establishedby a supervisory examination, a memorandum of understanding was signed betweenthe BNB Banking Supervision Department and the First East International Bank. Asa result the bank took active measures to fulfill memorandum commitments and im-proved its financial performance.

7. During the third quarter of 1998 the financial performance of Credit Bankworsened sharply, due partly to unfavorably acquired Russian debt instruments. Anumber of meetings with the bankís management were held. The Banking SupervisionDepartment requested a liquidity management plan. However, the plan presented didnot include realistic goals and tasks. As a result of the worsening liquidity crisis, bythe end of 1998 the bank stopped servicing payments. Following actions under Ar-ticle 21 of the Law on Banks, Credit Bank was declared insolvent.

87

It should be noted in conclusion that two registers were opened at the BankingSupervision Department: one for administrative measures, and one for administra-tive penalty proceedings. This is aimed at improving control over the fulfilment ofsupervisory measures imposed. These registers will significantly improve coordina-tion between individual structural units of the Banking Supervision Department.

3. Changes in Banking Supervision Regulations

Harmonization of Bulgarian banking regulation with the 25 basic principles ofthe Basle Committee for Effective Banking Supervision and EU directives entailregular reviews and assessments by the Supervision Policy Directorate on compli-ance with these documents. It should be noted that the bulk of international super-vision standards have already been applied in BNB practice. However, particular is-sues of banking legislation need further definition and fine tuning. For example,there is no adequate regulation on legal protection for banking supervision inspec-tors, on the exchange of information between supervisory institutions at national andinternational levels, on the requirement for evaluation, supervision and control ofrisks in bank management, on capital requirements for market risk, and on consoli-dated supervision on the insolvency of bank groups and financial holdings.

During the first half of 1998 BNB Regulation No. 22 on the Central Credit Reg-ister of Banks was adopted. This Regulation is aimed at maintaining a data base(updated monthly) on the indebtedness of bank clients and related entities. TheRegister is to become instrumental in adequate and reliable lending decision-mak-ing by banks. Regulation No. 4 on foreign currency positions of banks, RegulationNo. 9 on the evaluation of risk exposures of banks and the allocation of provisions tocover the risk related thereto, and Regulation No. 11 on liquidity management and su-pervision of banks, issued in late 1997 and early 1998, were supplemented by detailedinstructions for better identification, evaluation and reporting of the risks they regu-late.

Draft Regulation No. 2 on granting and revoking permits (licenses) to conductbank transactions and on granting and revoking other permits under the Law onBanks, and Draft Regulation No. 7 on banksí major exposures were prepared in 1998.These regulations will be approved by the BNB Board after the adoption of amend-ments to the Law on Banks. In 1998 the bulk of work on the Draft Regulation onthe consolidated supervision was done. This regulation is to be adopted in 1999.

The Uniform Chart of Accounts of Banks was supplemented by opening newaccounts and closing accounts inconsistent with the amendments to the Law on theAccountancy and National Accounting Standards.

Instructions on the enactment of a uniform accounting methodology in respectof government securities transactions were prepared, consistent with the amend-ments to Article 18, paras. 1 and 5 of the Law on the Accountancy, National Ac-counting Standard 25 and International Accounting Standard 25 (îReporting ofInvestment∑).

The fourth quarter of 1998 saw the launch of reporting forms and instructionson detailed bank financial reports for public announcement. These are in compli-ance with National and International Accounting Standards. This is in compliancewith the Law on the Accountancy and the Law on Banks under which the BNB de-termines the form and content of required reports. The instructions for completingadditional tables to the annual financial statement reflect detailed accounting prin-ciples for preparing financial reports, including consolidated ones.

Due to the great number of risks associated with the year 2000, the BulgarianNational Bank prepared and sent detailed questionnaire to commercial banks. Thisincludes seven major groups of issues: development of a strategy; provision of orga-nizational knowledge; assessment of necessary actions and design of detailed plans;innovation of systems and equipment; testing innovations; introduction of tried andtested systems; planning for extraordinary circumstances.

88

89

VI. BNB Financial Statements

90

91

1. Annual Financial Statement

The annual financial statement was prepared in accordance with the Lawon the BNB and the principles of International Accounting Standards.

The Issue Department balance sheet, whose assets reflect the structure andamount of BNB international foreign exchange reserves, was published weekly.Publicity was in line with the adopted policy of transparency in BNB operationsto ensure credibility in the national currency.

International foreign exchange reserves include invested cash in the form ofdeposits and nostro accounts (current accounts of prime-rate banks); monetarygold in bullions market standard (valued at DEM 500 per one troy ounce, or atmarket value based on the London Stock Exchange official exchange rate, iflower), cash placed in prime-rate high-liquid foreign government securities (atmarket value).

The Banking Department balance sheet assets include, inter alia, nonmon-etary gold and other precious metals; investment portfolio of securities held bythe Bank until maturity; loans and advances to banks net of provisions; receiv-ables from government on extended credits; Bulgariaís IMF quota; the depositwith the Issue Department; and fixed assets. The liabilities include all obligationsof the country to international financial institutions, BNB equity, and reserves.

BNB major revenue sources are income from interest, fees, commissionsand valuation adjustments. Central bank income depends primarily on flexiblemanagement of the Bankís international foreign exchange reserves, in compli-ance with Articles 28 and 31 of the Law on the BNB.

BNB interest income and expenses are recognized on the basis of the ac-crual method and income and expenses for fees and commissions are recognizedat the date of their origination.

In performance of the function of a fiscal agent on the cash basis reportingof the state budget the BNB services free of charge accounts of prime budgetentities. As a ëbank of banksí the BNB services commercial bank accounts free ofcharge.

Prior to the introduction of a currency board the bulk of BNB income com-prised net interest income primarily from operations in national currency (creditsto the MF and deposits with commercial banks). After currency board introduc-tion interest income is generated almost completely from operations in foreigncurrency and foreign currency denominated securities. Interest income generatedin the reporting period accounted for BGL 121.5 billion, including BGL 121.3billion (99.8%) from foreign currency operations and BGL 174 million from in-terest on lev deposits.

Interest expenses in 1998 totaled BGL 63.3 billion, including 92.4% in for-eign currency, against 32.4% in 1997. Net interest income amounted to BGL 58.2billion, a fivefold decrease on the previous year. The main reason for the de-crease was discontinued refinancing of commercial banks and rigid rules onlending to the budget (under Article 45 of the Law on the BNB).

In 1998 BNB net income from securities operations totaled BGL 54.4 bil-lion, a threefold decrease on the previous year. This is attributable to discontin-ued open market operations in mid-1997.

92

The structure of BNB net financial result prior to allocation of provisions wasas follows:

(%)

1998 1997

Net interest income 69.85 22.28Income from dividends 3.43 0.34Net income from fees and commissions -0.56 0.18Net income from government securities operations 65.36 12.68Net profit from valuation adjustments -43.40 63.78Other income 5.32 0.75Total 100.00 100.00

Source: BNB.

In 1998 the BNB continued to pursue a policy of cutting operating expenses. Inthe reporting year operating expenses declined by approximately BGL 700 millionfrom the previous year, attributable to a significant reduction (30%) of overheadexpenses.

93

Auditors� Report to the Membersof the Managing Board of the Bulgarian National Bank

We have audited the financial statements of the Bulgarian National Bank for theyear ended 31 December 1998, which are set out on pages 95 to 108.

Respective responsibilities of directors and auditorsAs set out in the Statement of Responsibilities, these financial statements are the

responsibility of the Managing Board. It is our responsibility to form an independentopinion, based on our audit, on those statements and to report our opinion to you.

Basis of opinionWe conducted our audit in accordance with International Standards on Auditing.

Those Standards require that we plan and perform the audit to obtain reasonable as-surance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclo-sures in the financial statements. An audit also includes assessing the accounting prin-ciples used and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audit provides a reason-able basis for our opinion.

Comparative figuresIn reporting on the financial statements for the year ended 31 December 1997, we

qualified our opinion on the basis that they were not prepared in accordance with In-ternational Accounting Standard (IAS) 29 ëFinancial Reporting in HyperinflationaryEconomiesí.

The impact of applying IAS 29 would have resulted in the 1997 net loss afterspecial transfers to reserves being BGL 137,019 million as compared to the historiccost net income of BGL 264,790 million, and the 1998 opening net assets beingBGL 1,626,748 million as compared to the historic cost basis of BGL 843,360 million.The comparative figures in the financial statements may, therefore, not be comparablewith the figures for the current year.

OpinionIn our opinion, the financial statements give a true and fair view of the financial

position of the Bulgarian National Bank as at 31 December 1998 and of the results ofits operations and its cash flows for the year then ended and, except for the effect onthe financial statements of the matter referred to in the preceding paragraph, have beenprepared in accordance with International Accounting Standards.

KPMG KPMG Bulgaria OODChartered Accountants Chartered AccountantsLondon Sofia29 April 1999 29 April 1999

94

Statement of Responsibilities

of the Managing Board of the

Bulgarian National Bank

The Law on the Bulgarian National Bank requires the Managing Board of theBulgarian National Bank to prepare financial statements each year to present theposition of the Bulgarian National Bank and the profit or loss for the period.

The financial statements prepared by the Bulgarian National Bank are basedon the accounting principles approved by the Managing Board in compliance withInternational Accounting Standards.

The Managing Board of the Bulgarian National Bank is responsible for main-taining proper accounting records which disclose with reasonable accuracy at anytime the financial position of the Bulgarian National Bank. It has a general respon-sibility for taking such steps as are reasonably open to it to safeguard the assets ofthe Bulgarian National Bank and to prevent or detect fraud and other irregularities.

29 April 1999

Svetoslav Gavriiski

Governor of the BNB

95

Balance Sheet

of the Bulgarian National Bank

as of 31 December 1998

Notes 1998 1997

million BGL million BGL

ASSETS

Cash and amounts due from banks 7 2,971,965 2,201,432

Gold and other precious metals 8 697,024 727,071

Securities 9 1,572,435 1,802,318

Loans to banks and other financial institutions 10 1,350 2,370

Interest receivable 12 17,877 10,955

Receivable from Government 13 1,665,949 1,632,128

Equity investments and quota in IMF 14 1,102,701 1,121,867

Property, plant and equipment 15 139,624 132,233

Other assets 16 8,760 5,148

Total assets 8,177,685 7,635,522

LIABILITIES

Due to banks and other financial institutions 17 551,436 769,308

Government deposits and current accounts 18 1,947,104 1,710,555

Borrowings against Bulgariaís IMF quota 19(a) 1,018,707 1,037,162

Borrowings from general resources of IMF 19(b) 1,866,957 1,674,802

Other borrowings 20 17,944 16,286

Currency in circulation 21 1,845,056 1,419,921

Accruals and other liabilities 22 94,370 164,128

Total liabilities 7,341,574 6,792,162

Shareholdersí funds

Capital 23 20,000 20,000

Reserves 24 816,111 823,360

Total liabilities and shareholdersí funds 8,177,685 7,635,522

The accompanying notes on pages 98 to 108 form an integral part of these financial statements.

The BNB Managing Board approved the financial statements on 29 April 1999.

Svetoslav Gavriiski

Governor of the BNB

96

Income Statement

Notes 1998 1997

million BGL million BGL

Interest and similar income 4 121,512 438,702

Interest expense and similar charges 4 (63,341) (151,277)

Net interest income 58,171 287,425

Dividend income 2,855 4,391

Net fees and commissions (464) 2,311

Net gains arising from securities 54,427 163,511

Net foreign exchange (losses)/gains 5 (36,145) 822,686

Other operating income 4,434 9,611

Operating expenses 6 (29,026) (29,719)

Bad debt recoveries 11 27,157 -

Provision for losses 11 (768) (385,932)

Net income from ordinary activities 80,641 874,284

Transfer from/(to) special reserves 24 42,940 (609,494)

Net income after special reserve transfer 123,581 264,790

Interim contribution to the State Budget - (34,000)

Final contribution to the State Budget 22 (91,450) (161,945)

Transfer to other reserves 24 32,131 68,845

The accompanying notes on pages 98 to 108 form an integral part of these financial statements.

97

Cash Flow Statement

Notes 1998 1997

million BGL million BGL

Net cash flow from operating activities

Net income from ordinary activities 80,641 874,284Adjustment for noncash and nonoperating items:Dividend income (2,855) (4,391)Provision for loan losses 11 768 385,932Bad debt recoveries (3,654) -Depreciation 6 5,937 786Net translation losses/(gains) 42,940 (719,166)Net cash flow from operating activities before

changes in operating assets and liabilities 123,777 537,445

Change in operating assets

Decrease/(increase) in gold and other precious metals 30,047 (117,717)Decrease/(increase) in securities 229,883 (1,294,886)Increase in receivable from Government (33,821) (608,583)Decrease /(increase) in loans to banks andother financial institutions 252 (209,889)(Increase)/decrease in interest receivableand other assets (10,534) 25,581

Change in operating liabilities

(Decrease)/increase in due to banksand other financial institutions (217,872) 634,501Increase in Government deposits and current accounts 236,549 1,504,231Increase in borrowings from IMF 173,700 450,144Increase in currency in circulation 425,135 1,281,757Decrease in accruals and other liabilities (68,100) (5,540)

Net cash flow from operating activities 889,016 2,197,044

Cash flow from investing activities

Purchase of fixed assets (6,552) (75,597)Dividends received from associated undertakings 2,855 4,391Decrease in equity investments and quota in IMF 19,166 2,866Net cash flow from investing activities 15,469 (68,340)

Cash flow from financing activities

Payment to Government (6,238) (34,000)(Decrease)/increase in long-term borrowings - (214,067)Other payment from reserves (46)Net cash flow from financing activities (6,284) (248,067)

Add (losses)/gains on foreign currency cash (127,668) 201,505Net increase in cash and cash equivalents (770,533) 2,082,142

Cash and cash equivalents at beginning of year 2,201,432 119,290

Cash and cash equivalents at end of year 7 2,971,965 2,201,432

The accompanying notes on pages 98 to 108 form an integral part of these financial statements.

98

Notes to the Financial Statements

1. Organization and operation

The Bulgarian National Bank (the ëBankí) is 100% owned by the Bulgarian state.The Bank is the central bank of Bulgaria. The operation of the Bank is governed by

the Law on the Bulgarian National Bank, which has been effective from 10 June 1997.Under this law, the primary objectives of the Bank may be summarized as:ï maintaining the stability of the national currency;ï the exclusive right to issue banknotes and coins; andï regulation and supervision of other banksí activities.The principal operations as a result of this law may be summarized as:ï the Bank may only provide funds to the government in accordance with rigid crite-

ria;ï the Bank may only lend to commercial banks in accordance with very stringent

terms and conditions;ï the Bank may not deal in Bulgarian government bonds;ï the Bank may not issue Bulgarian levs in excess of the Bulgarian lev equivalent of

the gross international foreign currency reserves; andï the Bank must prepare its accounts in accordance with International Accounting

Standards (IAS).

2. Basis of preparation

The financial statements are prepared in accordance with and comply with Interna-tional Accounting Standards. The financial statements are prepared under the histori-cal cost convention as modified for by the revaluation of certain assets and liabilities tofair value.

The comparative figures have been prepared in accordance with and comply withInternational Accounting Standards, except for IAS 29 ëFinancial Reporting in Hyper-inflationary Economiesí.

3. Summary of significant accounting policies

(a) Interest income and expense

Interest income and expense is recognized on an accrual basis and is calculated inaccordance with Bulgarian law or any agreement between lenders and borrowers. Inter-est income ceases to be accrued when a loan repayment becomes more than 90 daysoverdue.

(b) Fee and commission income and expense

Fee and commission income and expense are recognized in the income statement atthe date earned or incurred.

(c) Securities

Investment securities are those securities where the intention is to hold them untilmaturity. These are valued at cost, with any premium or discount on acquisition beingrecognized on an accrual basis.

Trading securities are those foreign debt securities which form part of the gross inter-national foreign exchange reserves of the Bank. These securities are recorded at mar-ket value. Movements in the market value of these securities are initially recognized inthe income statement and then transferred to a special reserve in accordance with theLaw on the Bulgarian National Bank.

(d) Loans and provisions for possible credit losses

Loans are stated in the balance sheet at the amount of principal outstanding less anyprovision for bad and doubtful debts. A provision is made for any amounts where re-covery is uncertain. The provision is recognized as an expense in the income statementand deducted from the total carrying amount of the loans.

(e) Gold and other precious metals

In accordance with the Law on the Bulgarian National Bank, monetary gold is valuedat the lower of DEM 500 per troy ounce or market value based on the official Londonfixing rate at the balance sheet date. Monetary gold is classified as gold in standardform.

Other precious metals, including nonstandard gold, are valued at market value basedon the official London fixing rate as of the balance sheet date.

99

(f) Investments in other entities

Details of investments held are set out in note 14.The wholly owned trading subsidiaries are included in the financial statements at the

cost of the investment and are not consolidated, as the effect of nonconsolidation ofthese subsidiaries is not material in the context of the financial statements taken as awhole.

Equity investments are included in the financial statements at the lower of cost andthe estimated market value of the investment. Certain of these, where the Bank holdsmore than 20% of the voting rights, are held exclusively with a view to disposing ofthem in the near future. Others which may be regarded as associated companies are in-cluded at cost as any adjustment under the equity method is not considered material inthe context of the financial statements taken as a whole.

(g) Property, plant and equipment

Property, plant and equipment are stated in the balance sheet at their purchase costas modified by any revaluations, less accumulated depreciation. Revaluations wereundertaken at 31 December 1998 in accordance with indices published by the Bulgariangovernment. When an assetís carrying amount is increased as a result of revaluation,the increase is credited directly to the reserves, subject to the revalued amount not ex-ceeding the estimated market value. When as assetís carrying amount is decreased as aresult of a revaluation, the decrease is offset against any previous revaluation in thereserves, with any excess being recognized as an expense.

Depreciation is provided on a straight line basis at prescribed rates designed to writeoff the cost or valuation of fixed assets over their expected useful lives. The followingare approximations of the annual rates used:

(%)Buildings 4Equipment, fixtures and fittings 15Motor vehicles 15Printing equipment 4 ≠ 16

A valuation was performed by the Managing Board on the fixed assets at 31 Decem-ber 1998.

Property, plant and equipment in progress are not depreciated until they are com-pleted or ready for use. The asset is then transferred to the relevant asset class anddepreciated accordingly.

(h) Foreign currencies

Income and expenditure arising in foreign currencies is translated at the official ratesof exchange ruling at the transaction date. Assets and liabilities denominated in foreigncurrencies are translated at the official exchange rate ruling on the last day of the ac-counting period. Gains and losses are recognized in the income statement. Gains andlosses are then transferred to or from a special reserve as permitted by the Law on theBulgarian National Bank. Foreign currency denominated nonmonetary assets and li-abilities are valued at the historical rate at acquisition.

Open forward foreign exchange contracts are valued at market value.The exchange rates of major foreign currencies at 31 December were:

Currencies 1998 1997

US dollar (USD) 1 : BGL 1,675.1 1 : BGL 1,776.5Deutschemark (DEM) 1 : BGL 1,000.0 1 : BGL 1,000.0European Currency Unit (ECU) 1 : BGL 1,962.9 1 : BGL 1,974.9Special drawing rights (SDR) 1 : BGL 2,356.5 1 : BGL 2,399.4

(i) Taxation

The Bank is not subject to income tax on profits. It is required to contribute a por-tion of its net income to the Bulgarian state as described in note 3(k).

(j) Loans from International Monetary Fund (IMF)

The borrowings from the IMF are denominated in special drawing rights (SDR). Anyunrealized exchange gains or losses are accounted for in accordance with note 3(h).

100

(k) Share capital and reserves

Share capital represents nondistributable capital of the Bank.In accordance with the Law on the Bulgarian National Bank, the Bank is required to

transfer to reserves 25% of the annual excess of revenue over expenditure. Specialfunds are established from 1% of the annual excess of income over expenditure; the netgains and losses arising on the translation of assets and liabilities denominated in for-eign currencies or gold; or on a decision of the Managing Board.

After transfers to reserves and special funds, the balance of the revenue over expen-diture is credited to the account of the state budget.

(l) Cash and cash equivalents

Cash and cash equivalents consist of cash in hand, nostro accounts, current accountsand term deposits with maturities of less than three months.

4. Interest income and expense

1998 1997million BGL million BGL

Interest incomeBanks and financial institutions ≠ in BGL 174 268,568 ≠ in foreign currencies 121,338 170,134

121,512 438,702

Interest expenseBanks and financial institutions ≠ in BGL 4,848 86,860 ≠ in foreign currencies 58,493 64,417

63,341 151,277

5. Net foreign exchange (losses)/gains

1998 1997million BGL million BGL

Revaluation of gold and precious metals (27,661) 363,280Foreign exchange gains 17,763 504,818Foreign exchange losses (26,247) (45,412)

(36,145) 822,686

6. Operating expenses

1998 1997million BGL million BGL

Personnel 9,222 6,617Depreciation charge 5,937 786Administration 13,179 19,011Other expenses 688 3,305

29,026 29,719

7. Cash and amounts due from banks

1998 1997million BGL million BGL

Foreign currency cash 17,764 13,508Nostro and current accounts with other banks 779,372 408,942Deposits in foreign currency 2,174,829 1,780,486Provision for credit losses - (1,504)

2,971,965 2,201,432

Interest is earned on foreign currency deposits at rates between 3% and 7% per an-num.

101

8. Gold and other precious metals

1998 1998 1997 1997thousand million thousand million

troy ounces BGL troy ounces BGL

Gold bullion in standard form 1,293 496,368 1,288 644,111Gold in other forms 124 126,215 94 12,645Other precious metals - 74,441 - 70,315Total 697,024 727,071

Gold in standard form includes gold held with correspondents. This gold earns inter-est at 1.5% per annum.

9. Securities

1998 1997million BGL million BGL

Market value of trading securitiesForeign treasury bills, notes and bonds 1,438,657 1,508,548Forward foreign exchange contracts 30 -

Total market value of trading securities 1,438,687 1,508,548Cost of investment securitiesForeign treasury bills 133,748 293,770

Total 1,572,435 1,802,318

Investment securities are US Treasury bills held with the Federal Reserve Bank ofNew York. These are held as collateral for the annual interest payments under theFront Loaded Interest Rate Bond (FLIRB) portion of the Bulgarian Brady bonds. Inter-est is earned on these US Treasury bills at approximately 4.5%. These securities havebeen included as an asset of the Bank as it is not the intention of the government to usethese securities in order to extinguish the interest liability. During 1998, two of thesebonds were transferred to the government as part of the payment for the final contribu-tion to the state budget.

10. Loans to banks and other financial institutions

1998 1997million BGL million BGL

Loans to domestic financial institutions: - in BGL 144,142 150,710 - in foreign currency 114,601 133,938Provision for possible credit losses (257,393) (282,278)Written down value of loans to domestic banks 1,350 2,370

During the year no interest has been accrued on these loans and they have a theoreti-cal maturity within one year.

11. Provision for losses

1998 1997million BGL million BGL

Provision against cash and amounts duefrom banks at 1 January 1,504 659Provision against equity at 1 January 369 -Provision against loans to banks andother financial institutions at 1 January 282,278 139,523Provision at 1 January 284,151 140,182Add charge for the year 768 385,932Less recoveries (27,157) -Less provisions on bad debts written off - (241,963)Provision at 31 December 257,762 284,151The provision may be analyzed as:Provision against cash and amounts due from banks - 1,504Provision against loans to banks andother financial institutions 257,393 282,278Provision against equity investments 369 369

257,762 284,151

102

12. Interest receivable

1998 1997million BGL million BGL

Interest on investments 15,043 8,334Interest on cash accounts and loans 2,202 2,129Other 632 492Total 17,877 10,955

13. Receivable from the government

1998 1997million BGL million BGL

Receivable from the government 1,665,949 1,632,128

The value of the receivable from the government at 31 December 1998 is SDR 708million (1997: SDR 680 million), see note 25(a).

The receivable bears interest at the same rates as those incurred on the borrowingsfrom the IMF and is repayable as follows:

Year million BGL

1999 213,7832000 234,5192001 492,7892002 373,2572003 123,3712004 63,9052005 41,0812006 41,0812007 41,0812008 41,082Total 1,665,949

The ability of the government to pay according to the repayment schedule will de-pend on the performance of the Bulgarian economy.

14. Equity investments and quota in IMF

1998 1997million BGL million BGL

Equity investments in Bulgarian institutions 3,188 2,503Bulgariaís IMF quota 1,095,611 1,115,462Equity investments in international financial institutions 4,271 4,271Provision against investments in Bulgarian institutions (369) (369)Total 1,102,701 1,121,867

None of the equity investments in international financial institutions exceeds 10% ofthe issued share capital of those entities. The significant equity investments in Bulgar-ian institutions may be analyzed as follows:

Name of institution Holding Principal activity

%SubsidiariesBORIKA 100 Management of cash point machinesBulgarian Mint EOOD 100 Minting coins

Subsidiaries held with a view to disposalBank for Agricultural Credit 52 Banking institution in process of liquidationAgrobusinessbank 85 Banking institution in process of liquidation

Associated companiesInternational Banking Institute 42 Financial training and researchCentral Depository AD 20 Agent for financial securities

Associated companies held with aview to disposalBank Consolidation Company 46 Holding company for state-owned

commercial banks to facilitate privatization

103

15. Property, plant and equipment

Land and Motor Fixtures Printing Assets in Other Total

buildings vehicles and fittings equipment progress

mln BGL mln BGL mln BGL mln BGL mln BGL mln BGL mln BGL

Cost or valuation

At 1 January 1998 14,824 2,081 1,618 60,496 55,641 614 135,274Additions 3,808 7 427 - 5,380 669 10,291Disposals (19) (92) (12) (550) - (26) (699)Transfers - - 319 10,171 (10,490) - -Revaluation 1,541 100 65 1,015 1,274 16 4,011

At 31 December 1998 20,154 2,096 2,417 71,132 51,805 1,273 148,877

Depreciation

At 1 January 1998 (258) (553) (489) (1,699) - (42) (3,041)Charge for the year (619) (640) (71) (4,559) - (48) (5,937)On disposals - 27 2 44 - - 73Revaluation (136) (36) (16) (159) - (1) (348)

At 31 December 1998 (1,013) (1,202) (574) (6,373) - (91) (9,253)

Net book value at

31 December 1998 19,141 894 1,843 64,759 51,805 1,182 139,624

Net book value at

31 December 1997 14,566 1,528 1,129 58,797 55,641 572 132,233

16. Other assets

1998 1997million BGL million BGL

Precious metal commemorative coins for sale 26 113Spare parts for printing equipment 2,279 2,256Prepayments 1,200 926Inventories 4,262 1,205Accounts receivable 993 648Total 8,760 5,148

17. Due to banks and other financial institutions

1998 1997million BGL million BGL

Demand deposits from banks and otherfinancial institutions - in BGL 388,869 571,660 - in foreign currency 162,567 128,700Total demand deposits 551,436 700,360

Time deposits from banks and other financial institutions - in BGL - 48,515 - in foreign currency - 20,433Total time deposits - 68,948Total 551,436 769,308

The Bank does not pay interest on demand deposits from banks and other financialinstitutions. Included in demand deposits is BGL 495,240 million representing theobligatory reserves which all domestic banks are required to maintain at the Bank aspart of their current accounts.

18. Government deposits and current accounts

1998 1997million BGL million BGL

Government deposits and current accounts: - in BGL 592,974 475,126 - in foreign currency 779,919 928,813State Fund for Reconstruction and Development 574,211 306,616Total 1,947,104 1,710,555

104

Government deposits and current accounts with the Bank comprise funds heldon behalf of government budget organizations and other government organizations.No interest is payable on current accounts. Government deposit accounts with theBank earn interest at or close to market rates in accordance with the Law on theBulgarian National Bank. The interest rate paid at 31 December 1998 was between3% and 4%.

19. (a) Borrowings against Bulgariaís IMF quota

1998 1997million BGL million BGL

Borrowings against Bulgariaís IMF quota 1,095,611 1,115,462Reserve tranche position (76,904) (78,300)Total 1,018,707 1,037,162

(b) Borrowings from general resources of IMF

1998 1997million BGL million BGL

Compensatory and contingency financing 150,815 258,171Standby facilities 1,160,764 1 023,096Extended fund facility 246,488 -Enlarged access 57,832 114,669Systemic transformation facility 251,058 278,866Total 1,866,957 1,674,802Total (a) and (b) 2,885,664 2,711,964

Borrowings from the IMF are denominated in SDR and amount to SDR 1,225 millionat 31 December 1998 (31 December 1997: SDR 1,130 million). Borrowings related toBulgariaís IMF quota are noninterest-bearing with no stated maturity, while borrowingsfrom the general resources of IMF bear interest at rates set by the IMF, between 4%and 5%, and are repayable over a ten-year period.

Borrowings from the IMF are guaranteed by promissory notes which have beencosigned by the government and the Bank. The total promissory notes outstanding asat 31 December 1998 are BGL 2,962,128 million, see note 30.

20. Other borrowings

1998 1997million BGL million BGL

Guarantee funds 17,792 16,174Promissory notes issued 2 2Other borrowings 150 110Total 17,944 16,286

21. Currency in circulation

1998 1997million BGL million BGL

Coins and currency in circulation - banknotes 1,839,327 1,418,138 - coins 5,729 1,783Total 1,845,056 1,419,921

The above balances represent the amount of BGL coins and banknotes issued by theBank other than that held by the Bank itself. The movement of banknotes in circulationis as follows:

105

1998 1997million BGL million BGL

Balance at 1 January 1,418,138 137,258Banknotes issued into circulation 455,406 1,289,317Banknotes withdrawn from circulation and destroyed (34,217) (8,437)Balance at 31 December 1,839,327 1,418,138

22. Accruals and other liabilities

1998 1997million BGL million BGL

Dividend payable to government 91,450 161,945Accrued interest payable 2,103 1,336Salaries and social security payable 28 9Other payables 789 838Total 94,370 164,128

23. Capital

1998 1997million BGL million BGL

Balance at 1 January 20,000 200Capitalization of reserves - 19,800Balance at 31 December 20,000 20,000

The total authorized capital of the Bank is BGL 20 billion.

24. Reserves

Asset Foreign Other Total

revaluation exchange reserves

reserve reserve

1998 1998 1998 1998

mln BGL mln BGL mln BGL mln BGL

Balance at 1 January 1998 720,375 64,927 823,360Net asset revaluation 2,668 - - 2,668Transfer of unrealized gold revaluation loss - (27,661) - (27,661)Transfer of net foreign exchange loss - (15,279) - (15,279)Other transfers - 938 (46) 892Profit for the year - - 32,131 32,131Balance at 31 December 40,726 678,373 97,012 816,111

1997 1997 1997 1997

mln BGL mln BGL mln BGL mln BGL

Balance at 1 January - 110,881 15,882 126,763Fixed asset revaluation 38,058 - - 38,058Transfer of unrealized gold revaluations - 362,378 - 362,378Transfer of net foreign exchange gains - 356,788 - 356,788Transfer of gain on loan restructuring - 77,509 - 77,509Transfer of loss on loan restructuring - (187,181) - (187,181)Profit for the year - - 68,845 68,845Capitalization of reserves - - (19,800) (19,800)Balance at 31 December 38,058 720,375 64,927 823,360

25. Related party transactions

(a) Bulgarian Government

International Monetary FundAll IMF borrowings are undertaken through the Bank. Both the Bank and the gov-

ernment of Bulgaria have borrowings with the IMF. The governmentís IMF borrowingshave been matched by a receivable from the government. In order to eliminate anyexchange rate movements, the government receivable is denominated in SDR.

Where the borrowings are on behalf of the government, these borrowings are the li-ability of the government. The interest on these borrowings is paid by the government.Accordingly no interest revenue is included in these accounts for either the receivablefrom the government nor is interest expense included on the governmentís portion of theIMF borrowings, see note 13.

The IMF quota is supported by promissory notes jointly signed by the Bank and thegovernment, see note 19(b).

Government bank accountsGovernment budget organizations and other government organizations have current

accounts and time deposits with the Bank. No interest is payable on current accounts

106

from government budget organizations, see note 18.Equity investmentsThe Bank has participations in various international financial institutions, including

the BIS, EBRD and the World Bank, see note 14.

(b) Domestic equity participations

Bank accountsThe Bank holds deposits from its investments in local entities in accordance with the

Law on the Bulgarian National Bank, see note 14.

26. Foreign currency positions

The amounts of assets and liabilities held in BGL and in foreign currencies can beanalyzed as follows:

BGL Foreign BGL Foreigncurrencies currencies

1998 1998 1997 1997mln BGL mln BGL mln BGL mln BGL

Assets

Cash and amounts due from banks - 2,971,965 - 2,201,432Gold and other precious metals - 697,024 - 727,071Securities - 1,572,435 - 1,802,318Loans to banks and other financial institutions - 1,350 - 2,370Interest receivable - 17,877 52 10,903Receivable from government - 1,665,949 - 1,632,128Equity investments and quota in IMF 6,009 1,096,692 2,134 1,119,733Property, plant and equipment 139,624 - 132,233 -Other assets 8,760 - 5,148 -

Total assets 154,393 8,023,292 139,567 7,495,955

Liabilities

Due to banks and other financial institutions 388,869 162,567 620,175 149,133Government deposits and current accounts 609,271 1,337,833 517,376 1,193,179Borrowings against Bulgariaís IMF quota - 1,018,707 - 1,037,162Borrowings from general resources of IMF - 1,866,957 - 1,674,802Other borrowings 17,944 - 16,286 -Currency in circulation 1,845,056 - 1,419,921 -Accruals and other liabilities 94,370 - 164,128 -

Total liabilities 2,955,510 4,386,064 2,737,886 4,054,276

Net assets (2,801,117) ,3,637,228 (2,598,319) 3,441,679

27. Maturity analysis

The assets and liabilities of the Bank analyzed over the remaining period from thebalance sheet date to contractual repricing or intended maturity is as follows:

million BGLUp to 1 From 1 to From 2 months From 1 to Over 5 Total

month 2 months to 1 year 5 years years

Assets

Cash and amounts due from banks 2,971,965 - - - - 2,971,965Gold and other precious metals 200,656 - - - 496,368 697,024Securities 1,438,687 - - - 133,748 1,572,435Loans to banks and other financial institutions - - 1 350 - - 1 350Interest receivable 3,167 1,548 13,162 - - 17,877Receivable from government 22,068 6,087 185,628 1,287,841 164,325 1,665,949Equity investments and quota in IMF - - - 3,188 1,099,513 1,102,701Property, plant and equipment - - - - 139,624 139,624Other assets - - 8,760 - - 8,760

Total assets 4,636,543 7,635 208,900 1,291,029 2,033,578 8,177,685

Liabilities

Due to banks and other financial institutions 541,436 - 10,000 - - 551,436Government deposits and current accounts 1,940,824 - - - 6,280 1,947,104Borrowings against Bulgariaís IMF quota 183,022 - - - 835,685 1,018,707Borrowings from general resources of IMF 22,068 6,087 185,628 1,488,849 164,325 1,866,957Other borrowings 17,792 150 - - 2 17,944Currency in circulation - - - 3,391 1,841,665 1,845,056Accruals and other liabilities 2,920 - 91,450 - - 94,370Capital - - - - 20,000 20,000Reserves - - - - 816,111 816,111

Total liabilities 2,708,062 6,237 287,078 1,492,240 3,684,068 8,177,685

Maturity surplus / (shortfall) 1,928,481 1,398 (78,108) (201,211) (1,650,490)

107

28. Financial instruments

A financial instrument is defined by IAS 32 as any contract that gives rise to both afinancial asset of one enterprise and a financial liability or equity instrument of anotherenterprise.

The balance sheet of the Bank is largely comprised of financial instruments. Theseinstruments expose the Bank to many risks, including interest rate risk, foreign exchangerisk and credit risk.

Interest rate riskInterest rate risk may be defined as the risk that the Bank is exposed to changes in

the value of their financial assets and liabilities due to changes in interest rates. Thesize of this risk is a function of:

ï the relevant financial asset or liabilityís underlying interest rate; andï the maturity structure of the Bankís portfolio of financial instruments.A majority of the financial assets of the Bank are interest-bearing. The financial li-

abilities of the Bank include liabilities which are both noninterest-bearing and interest-bearing. These have been disclosed in notes 17 to 22. Those assets and liabilities of theBank which are interest-bearing are based on rates which have been set at or close tomarket levels.

The maturity structure of the Bankís financial assets and liabilities is disclosed inNote 27.

Foreign exchange riskForeign exchange risk may be defined as the risk that the Bank is exposed to changes

in the value of their financial assets and liabilities due to changes in exchange rates.The size of this risk is a function of:

ï the mismatch in the Bankís foreign currency assets and liabilities; andï the underlying contract rate of outstanding foreign exchange transactions at year-

end.The exchange rate of the Bulgarian lev to the Deutschemark is fixed in accordance

with the Law on the Bulgarian National Bank. At 31 December 1998, the Bank hadoutstanding forward foreign exchange contracts, see note 9. In accordance with the Lawon the Bulgarian National Bank, the Bank is required to match foreign currency assetsand liabilities other than Deutschemarks, to within 2%. Accordingly, foreign exchangeexposure is limited.

Credit riskCredit risk is defined by IAS 32 as the risk that one party to a financial instrument

will fail to discharge an obligation and cause the other party to incur a loss. Disclosureof credit risk enables the user of financial statements to assess the extent to which fail-ures by counterparties to discharge their obligations could reduce the amount of futurecash inflows from financial assets on hand at the balance sheet date.

The size and concentration of the Bankís exposure to credit risk can be obtained di-rectly from the balance sheet and notes 7 to 14 of the financial statements which de-scribe the size and composition of the Bankís financial assets. The Bank has not en-tered into collateral agreements in relation to their credit exposure.

Fair valueFair value information is widely used in determining an enterpriseís overall financial

position and in making decisions about individual financial instruments. It is also rel-evant to users of financial statements since, in many circumstances, it reflects the judg-ment of the financial markets as to the present value of expected future cash flows.

The principal determinants of fair value for the Bankís assets and liabilities are com-modity prices, interest rates, exchange rates and credit risk. In the case of marketableassets such as precious metals and foreign debt securities full fair values as at the bal-ance sheet date are directly reflected in the balance sheet. In other cases the exchangerate element is specifically allowed for in the determination of carrying value. The fairvalues of loans and deposits, insofar as this is determinable by interest rates, are notconsidered to be materially different from their carrying values. Where significantcredit risk is considered to be present, it is allowed for in the provision for bad anddoubtful debts.

As at the balance date the Bank did not have any significant exposure in off-balance-sheet derivative transactions.

108

29. Financial reporting in hyperinflationary economies

In 1997 the Bulgarian economy was subject to hyperinflation prior to the introductionof the currency board in July 1997. Under IAS 29, Reporting in HyperinflationaryEconomies, the financial statements are required to be reported in terms of the measur-ing unit current at the balance sheet date. In 1997, the Managing Board did not con-sider the implementation of IAS 29 to be appropriate, as a result the financial state-ments were qualified.

The economy is now not considered to by hyperinflationary as inflation for the last 12months has been 1%. The inflation rates published by the National Statistical Institutemay be summarized as:

%For the year ended 31 December 1998 1For the six months ended 31 December 1997 16.2For the year ended 31 December 1997 578.6

Effect on the 1998 financial statements

As the 1997 monetary assets and liabilities were not restated in accordance with IAS29, the opening net assets in the financial statements do not comply with this standard.The impact on the 1 January 1998 is summarized as:

Opening balance Opening balancefinancial statements applying IAS 29

million BGL million BGL

Net assets 843,360 1,626,748

30. Commitments and contingencies

As at 31 December 1998 the Bank had BGL 1 billion of commitments to purchasefixed assets.

The total nominal value of open forward contracts as at 31 December 1998 isBGL 3.4 billion.

The Bank has uncalled capital on its investment in the Bank for International Settle-ments amounting to 6,000 shares of 2,500 gold francs each.

The Bank received a building valued at BGL 3.7 billion, resulting from the recoveryof a bad debt which it has capitalised in its financial statements. However the contractstipulates that a third party creditor may also have a claim to recover the buildingagainst a debt owed. The Bank believes the likelihood of such a third party making aclaim is remote.

The IMF quota is supported by promissory notes jointly signed by the Bank and thegovernment amounting to BGL 2,962,128 million.

Otherwise, there were no other outstanding guarantees, letters of credit or commit-ments to purchase or sell either gold, other precious metals or foreign currency.

109

2. Report on the Execution of BNB Budget

The BNB Budget for 1998 was adopted by BNB Managing Board ResolutionNo. 535 of 22 December 1997, and was approved by the 38th National Assembly on15 May 1998 pursuant to Article 86 of the Constitution of the Republic of Bulgariaand Article 48 of the Law on the Bulgarian National Bank. The BNB Budget wasbased on 1998 macroeconomic estimates used in the agreement with the IMF inOctober 1997. BNB Budget structure includes two sections and assumes an ex-change rate of BGL 1,800 per USD 1 and an expected average annual inflation rateof 37.4% and 16.4% by the yearís end.

The BNB Budget contains two autonomous sections: Bank operating expensesincluding all expenses on the Bankís current activity; and an investment program, in-cluding projected investment in long-term tangible and intangible assets.

In 1998 projected expenditure on BNB current activity totaled BGL 61,010million. By the end of 1998 BGL 29,027 million or 47.6% was used. The shortfall inbudgeted expenditure is attributable to the lower than projected exchange rate andinflation.

Expenditure made on the currency in circulation accounted for 22.3% of totalexpenditure and 26.8% of projected budget expenditure for 1998.

Expenses incurred on banknote printing in 1998 included only costs on print-ing banknotes of BGL 1,000 nominal value, issue 1997. Due to pendingredenomination of the lev in 1999, banknotes of BGL 5,000, BGL 10,000,BGL 20,000 and BGL 50,000 nominal value were not printed in 1998. Coins ofBGL 100, BGL 200 and BGL 500 were not minted for the same reason. As a resultexpenditure on currency in circulation decreased.

Expenses on salaries and employee benefits made up 29.4% of total operatingexpenditure. In accordance with the BNB policy of economizing funds, the BNBmanagement optimized the bankís structure and salary costs were 14% less thanprojected.

Within operating expenses, those on materials, services and repairs comprisedthe biggest share: 46% of total operating expenses and 50% of forecast.

Projected funds for materials, heating, power and equipment maintenance andhire charges have not been entirely utilized as BNBís Montana Branch was notopened. To reduce its investment expenses and collect a portion of receivables fromcommercial banks, the BNB acquired a bank building in the city of Vratza. Thisbuilding will be used for a BNB branch due to open in 1999.

Other portions of funds remained unused due to the lack of real production inthe Banknote Printing Department at the BNB Printing Works. Depreciation ex-penses were reduced by a more gradual introduction of machines and equipment inthe BNB Printing Works. Leaving parts of the Printing Works premises for latercompletion also contributed to the reduction in expenditure.

Budgeted investment expenses totaled BGL 28,503 million. Of this, BGL 6,461million was spent by the end of 1998. Since the BNBís Montana Branch was notopened, funds amounting to BGL 3,000 million remained unused. Other funds re-mained unused because the planned refurbishment of the BNBís Plovdiv Branchwas cancelled and less than projected costs were incurred for the reconstruction ofthe BNBís Burgas Branch. Expenses were incurred on the refurbishment of theBNBís main building.

Expenditures on the BNB Printing Works made up the largest share (58.6%)of total investment spending. Equipment for the BNB Printing Works was commis-sioned in 1998, leaving only contracts on security equipment to be finalized.

During 1998 personal computers and software were purchased, consistent withthe bankís equipment rollover program.

OperatingExpenses

InvestmentExpenses

110

Funds of BGL 5,400 million for the introduction of integrated electronic sys-tems in the BNB were not invested in 1998. After consultations with internationaland Bulgarian experts, it was decided that work on the introduction of these systemsshould commence in 1999.

EXECUTION OF BNB BUDGET IN 1998

Budget Reporting, % of

Code Indicators forecast 31 December totalfor 1998 1998 expenses

(million BGL) (million BGL)

SECTION I. BNB OPERATING EXPENSES

1000 Currency circulation expenses 24,126 6,454 22.241100 Banknote issue and coin mintage 23,008 6,238 21.501500 Fixtures and fittings 342 144 0.501600 Banknote destruction 25 0 0.001800 Vault costs and other expenses 751 72 0.252000 Salaries and employee benefits 9,875 8,531 29.392100 Pay-roll expenses 8,620 7,362 25.372200 Part-time services expenses 1,255 1,169 4.033000 Materials, services, overhauls 26,282 13,358 46.023100 BNB current support expenses 5,405 2,704 9.323105 Current support of BNB special vehicles 240 236 0.823110 Current expenses on BNB Printing Works 5,259 917 3.163600 Security equipment maintenance and hire charges 1,750 526 1.823650 Depreciation expenses 8,500 5,937 20.463700 Charges paid to Bankservice and BORICA 600 507 1.753800 Other expenses 3,175 2,040 7.033900 Overhaul expenses 1,353 491 1.705000 BNB social activity expenses 727 684 2.35

Total Section I (1000+2000+3000+5000) 61,010 29,027 100.00

SECTION II. INVESTMENT

4000 Expenses on fixed assets 28,503 6,461 100.004100 Real estate expenses 10,595 611 9.464200 Expenses on currency in circulation equipment 2,172 129 2.004300 BNB Printing Works 7,270 3,787 58.624310 Expenses on BNB Printing Works reconstruction 3,346 1,910 29.574320 Expenses on BNB Printing Works equipment 3,924 1,877 29.064400 Expenses on BNB security equipment 250 36 0.564500 Expenses on BNB office equipment 1,210 539 8.354700 Expenses on BNB computerization 1,606 1,359 21.044800 Expenses on BNB integrated systems installation 5,400 0 0.00

Total Section II 28,503 6,461 100.00

Appendix

112

The methodology and scope of the respective indicators are comprehensively presented inBNB 1998 Monthly Bulletin issues.

Contents

Gross Domestic Product ______________________________________________ 113Employment in 1997 and 1998 _________________________________________ 114Consumer Price Indices in 1998 (previous month = 100) __________________ 115Consumer Price Indices in 1998 (December 1997 = 100) _________________ 115Exports by Commodity Group _________________________________________ 116Imports by Commodity Group _________________________________________ 117Exports by Use_______________________________________________________ 118Imports by Use_______________________________________________________ 119Exports by Major Trading Partner and Region ___________________________ 120Imports by Major Trading Partner and Region ___________________________ 121Balance of Payments (in accordance with IMF 5th editionof the Balance of Payments Manual)____________________________________ 122Gross Foreign Debt __________________________________________________ 124Foreign Debt Service _________________________________________________ 124Debt Indicators ______________________________________________________ 125Cash Basis Reporting of the Central Government Budget _________________ 126Consolidated State Budget_____________________________________________ 128Domestic Government Debt and GovernmentGuaranteed Debt by Debt Instrument ___________________________________ 130Foreign Government Debt by Debt Instrument___________________________ 132Payments on Foreign Government Debt by Source _______________________ 132Payments on Foreign Government Debt by Creditor ______________________ 132Balance Sheet of BNB ________________________________________________ 133Monetary Survey _____________________________________________________ 134Analytical Reporting of the BNB _______________________________________ 138Analytical Reporting of Commercial Banks ______________________________ 140Nominal Interest Rates on Short-term Credits in 1998 ____________________ 144Real Interest Rates on Short-term Credits in 1998 ________________________ 144Nominal Interest Rates on One-month Deposits in 1998 __________________ 145Real Interest Rates on One-month Deposits in 1998 ______________________ 145Commercial Bank Interest Rates on New Lev Credits and Deposits ________ 146Denomination Composition in Notes and Coins __________________________ 147Consolidated Balance Sheet of Commercial Banks _______________________ 148Consolidated Income Statement of Commercial Banks ____________________ 152Capital Adequacy of Commercial Banks ________________________________ 156Classification of Commercial Bank Risk Exposuresas of 31 December 1998, Total _________________________________________ 157Classification of Commercial Bank Risk Exposures to Banksand Other Financial Institutions________________________________________ 158Classification of Commercial Bank Risk Exposures toNonfinancial Institutions and Other Clients______________________________ 159Major Resolutions of the Managing Board of the BNB____________________ 160

113

GROSS DOMESTIC PRODUCT

1996 1997 1998* 1998*

Gross added value 1650372 15294482 19203204 15569843 101.8 1.8 By economic sector Agriculture 253652 4062698 4045375 4119022 101.4 1.4 Industry 497862 4316306 5508751 4501790 104.3 4.3 Services 898858 6915478 9649078 6949031 100.5 0.5

By type of ownership Private 9641477 12241848 10248307 106.3 6.3 Public 5653005 6961356 5321536 94.1 -5.9

Adjustments 98329 1760723 2373816 2087410 118.6 18.6

GDP By component of final demand 1748701 17055205 21577020 17657253 103.5 3.5 Final consumption 1547730 14169824 18989004 15235036 107.5 7.5 Individual 1448259 13115372 17227205 14105878 107.6 7.6 Collective 99471 1054452 1761799 1129158 107.1 7.1 Gross capital formation 146863 1941742 3181229 2801509 In fixed capital 238470 1840974 2495596 2141917 116.4 16.4 Reserve change -91607 100768 685633 659592 Balance (exports ≠ imports) 54108 943639 -227979 -428460 Exports of goods and services 1099950 10555860 9755489 8911042 84.4 -15.6 Imports of goods and services 1045842 9612221 9983468 9339502 97.2 -2.8 Statistical discrepancy -365234 49168

*NSI preliminary data for 1998.

Source: NSI.

Indicators Growth rateon 1997, %at current prices, million BGL

at average 1997prices, million

BGL

Physicalvolume indexbased on 1997

114

Tot

al3

157

435

1 41

2 09

41

745

341

3 10

6 16

91

284

970

1 82

1 19

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286

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470

282

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5

116

EXPORTS BY COMMODITY GROUP

Commodity groups* 1997 1998million USD share, % million USD share, % million USD %

Textile, leather materials, clothing, footwear and other consumer goodsincluding: 800.0 16.2 862.6 20.1 62.6 7.8Chapter 62. Clothing and accessories to clothing other than knitwear 221.8 4.5 284.7 6.6 62.9 28.4Chapter 61. Clothing and accessories to clothing from knitwear 128.8 2.6 162.3 3.8 33.4 25.9Chapter 64. Shoes, gaiters and similar articles; their components 121.3 2.5 112.1 2.6 -9.2 -7.6Chapter 94. Furniture; medical furniture; sleeping accessories and

similar articles 42.6 0.9 49.5 1.2 6.9 16.2

Base metals and their productsincluding: 1050.8 21.3 844.1 19.7 -206.7 -19.7Chapter 72. Cast-iron, iron and steel 505.6 10.2 413.2 9.6 -92.4 -18.3Chapter 74. Copper and its products 286.3 5.8 208.9 4.9 -77.4 -27.0Chapter 73. Cast-iron, iron and steel products 64.0 1.3 72.2 1.7 8.2 12.8Chapter 79. Zink and its products 80.1 1.6 67.1 1.6 -13.0 -16.2

Animal and vegetable products, food, drink and tobaccoincluding: 701.9 14.2 689.9 16.1 -12.0 -1.7Chapter 22. Soft and alcoholic drinks and vinegars 145.4 2.9 110.4 2.6 -35.0 -24.1Chapter 24. Tobacco and processed substitutes 164.8 3.3 90.8 2.1 -74.0 -44.9Chapter 10. Cereals 14.1 0.3 144.1 3.4 130.0 922.3Chapter 12. Oil-bearing seeds and fruits; miscellaneous seeds 37.8 0.8 54.8 1.3 16.9 44.8

Machines, transport facilities, appliances, tools and weaponsincluding: 720.4 14.6 686.0 16.0 -34.4 -4.8Chapter 84. Nuclear reactors, boilers, machines, appliances and machinery; spare parts 262.7 5.3 269.0 6.3 6.3 2.4Chapter 85. Electrical machines and appliances 179.2 3.6 139.2 3.2 -40.0 -22.3Chapter 89. Sea and river shipping 75.8 1.5 78.4 1.8 2.6 3.4

Chemical products, plastics and rubberincluding: 914.0 18.5 640.1 14.9 -273.8 -30.0Chapter 29. Organic chemical products 185.9 3.8 104.1 2.4 -81.8 -44.0Chapter 28. Inorganic chemical products 117.7 2.4 103.5 2.4 -14.2 -12.1Chapter 39. Plastics and plastic products 124.1 2.5 96.9 2.3 -27.2 -21.9Chapter 33. Essential oils, perfumes and toiletries 94.1 1.9 82.2 1.9 -11.9 -12.7Chapter 31. Fertilizers 172.9 3.5 80.5 1.9 -92.5 -53.5Chapter 30. Pharmaceuticals 121.7 2.5 80.3 1.9 -41.4 -34Chapter 40. Rubber and rubber products 48.2 1.0 50.7 1.2 2.5 5.1

Mineral products and fuelsincluding: 512.5 10.4 345.7 8.1 -166.8 -32.5Chapter 27. Mineral fuels, mineral oils and distilled products 375.1 7.6 267.8 6.2 -107.3 -28.6Chapter 25. Salt; sulphur; soil and stones; plaster, lime and cement 75.0 1.5 47.9 1.1 -27.0 -36.0

Wood, paper, earthenware and glass productsincluding: 240.1 4.9 224.5 5.2 -15.6 -6.5Chapter 44. Wood and wood products; wood coal 82.2 1.7 88.0 2.0 5.8 7.1

EXPORTS, TOTAL (FOB) 4939.7 100.0 4293.0 100.0 -646.7 -13.1

* Commodity groups include chapters from the Harmonized System for Commodity Description and Coding.Note: Final data for 1997, for 1998 ≠ preliminary data as of 31 March 1999.

Source: Customs declarations data received from the MF Computing Center and NSI and adjusted by the BNB.

Change onthe previous year

January ≠ December

117

IMPORTS BY COMMODITY GROUP

Commodity groups* 1997 1998million USD share, % million USD share, % million USD %

Mineral products and fuelsincluding: 1793.4 36.4 1399.2 28.0 -394.2 -22Chapter 27. Mineral fuels, mineral oils and distilled products 1499.7 30.4 1088.6 21.8 -411.1 -27.4Chapter 26. Ores, slags and ashes 159.8 3.2 191.3 3.8 31.5 19.7

Machines, transport facilities, appliances, tools and weaponsincluding: 892.0 18.1 1160.1 23.2 268.0 30.0Chapter 84. Nuclear reactors, boilers, machines, appliances and

machinery; spare parts 447.2 9.1 490.5 9.8 43.3 9.7Chapter 85. Electrical machines and appliances 199.8 4.1 264.2 5.3 64.4 32.2Chapter 87. Automobile transport 126.6 2.6 238.2 4.8 111.6 88.1Chapter 90. Optical instruments and appliances 78.2 1.6 97.6 2.0 19.5 24.9

Textile, leather materials, clothing, footwear and other consumer goodsincluding: 709.3 14.4 765.3 15.3 56.0 7.9Chapter 52. Cotton 124.5 2.5 118.2 2.4 -6.4 -5.1Chapter 55. Staple synthetic and artificial fibres 108.9 2.2 103.9 2.1 -4.9 -4.5Chapter 61. Clothing and accessories to clothing from knitwear 52.9 1.1 84.8 1.7 31.8 60.1Chapter 54. Synthetic or artificial fibres 51.3 1.0 63.5 1.3 12.1 23.7

Chemical products, plastics and rubberincluding: 601.0 12.2 738.9 14.8 138.0 23.0Chapter 28. Inorganic chemical products 89.5 1.8 133.6 2.7 44.1 49.3Chapter 39. Plastics and plastic products 104.4 2.1 127.9 2.6 23.4 22.4Chapter 30. Pharmaceuticals 82.3 1.7 100.1 2.0 17.7 21.5Chapter 38. Miscellaneous products of chemical industry 68.8 1.4 82.7 1.7 13.9 20.1Chapter 29. Organic chemical products 96.7 2.0 76.9 1.5 -19.8 -20.5Chapter 40. Rubber and rubber products 54.1 1.1 71.4 1.4 17.3 32.0

Animal and vegetable products, food, drink and tobaccoincluding: 428.3 8.7 382.5 7.7 -45.8 -10.7Chapter 17. Sugar and sugar products 107.3 2.2 63.4 1.3 -43.9 -40.9

Base metals and their productsincluding: 303.8 6.2 321 6.4 17.3 5.7Chapter 72. Cast-iron, iron and steel 106.7 2.2 132.1 2.6 25.4 23.8Chapter 73. Cast-iron, iron and steel products 68.5 1.4 69.2 1.4 0.7 1.0Chapter 76. Aluminium and aluminium products 68.1 1.4 59.1 1.2 -9.0 -13.2

Wood, paper, earthenware and glass productsincluding: 204.2 4.1 228.1 4.6 23.9 11.7Chapter 48. Paper and cardboard; products of cellulose, paper and cardboard 100.4 2.0 126.7 2.5 26.3 26.2

IMPORTS, TOTAL (CIF) 4932.0 100.0 4995.2 100.0 63.2 1.3( - ) Freight expenditure 372.7 386.6IMPORTS, TOTAL (FOB) 4559.3 4608.6 49.3 1.1

* Commodity groups include chapters from the Harmonized System for Commodity Description and Coding.Note: Final data for 1997, for 1998 ≠ preliminary data as of 31 March 1999.

Source: Customs declarations data received from the MF Computing Center and NSI and adjusted by the BNB.

Change onthe previous year

January ≠ December

118

Consumer goods 1393.8 28.2 1310.5 30.5 -83.3 -6.0 Food 290.8 5.9 232.2 5.4 -58.6 -20.2 Cigarettes 128.0 2.6 59.7 1.4 -68.4 -53.4 Drink 141.6 2.9 141.9 3.3 0.3 0.2 Clothing and footwear 446.7 9.0 534.9 12.5 88.2 19.8 Medical goods and cosmetics 194.1 3.9 156.9 3.7 -37.2 -19.2 Housing and home furniture 87.2 1.8 90.3 2.1 3.1 3.5 Other 105.4 2.1 94.6 2.2 -10.8 -10.2

Raw and other materials 2429.8 49.2 2016.5 47.0 -413.3 -17.0 Cast-iron, iron and steel 505.6 10.2 413.2 9.6 -92.4 -18.3 Nonferrous metals 426.8 8.6 308.4 7.2 -118.4 -27.8 Chemical products 301.8 6.1 200.4 4.7 -101.4 -33.6 Plastics, rubber 167.6 3.4 142.7 3.3 -24.9 -14.8 Fertilizers 172.9 3.5 80.5 1.9 -92.5 -53.5 Textile materials 226.4 4.6 196.2 4.6 -30.3 -13.4 Food feedstocks 106.5 2.2 157.6 3.7 51.1 48.0 Wood and paper, cardboard 125.5 2.5 130.8 3.0 5.2 4.1 Cement 50.7 1.0 24.5 0.6 -26.2 -51.7 Tobacco 36.8 0.7 50.7 1.2 13.9 37.8 Other 309.0 6.3 311.6 7.3 2.6 0.8

Investment goods 727.5 14.7 695.3 16.2 -32.2 -4.4 Machines, tools and appliances 204.0 4.1 205.2 4.8 1.2 0.6 Electrical machines 83.3 1.7 66.4 1.5 -16.8 -20.2 Transportation facilities 88.8 1.8 96.0 2.2 7.2 8.1 Spare parts and equipment 128.3 2.6 107.5 2.5 -20.8 -16.2 Other 223.2 4.5 220.2 5.1 -2.9 -1.3

Nonenergy goods, total 4551.2 92.1 4022.4 93.7 -528.8 -11.6

Energy resources 388.5 7.9 270.6 6.3 -117.9 -30.3 Oil products 264.7 5.4 148.5 3.5 -116.3 -43.9 Electricity 106.7 2.2 115.8 2.7 9.1 8.5 Other 17.1 0.3 6.4 0.1 -10.7 -62.8

EXPORTS, TOTAL (FOB) 4939.7 100.0 4293.0 100.0 -646.7 -13.1

Note: Final data for 1997, for 1998 ≠ preliminary data as of 31 March 1999.

Source: Customs declarations data received from the MF Computing Center and NSI and adjusted by the BNB.

EXPORTS BY USE

Commodity groups 1997 1998million USD share, % million USD share, % million USD %

Change onthe previous year

January ≠ December

119

Consumer goods 514.8 10.4 729.8 14.6 215.0 41.8 Food, drink and cigarettes 139.9 2.8 192.1 3.8 52.2 37.3 Housing and home furniture 67.2 1.4 91.8 1.8 24.7 36.8 Medical goods and cosmetics 95.0 1.9 136.9 2.7 42.0 44.2 Clothing and footwear 105.5 2.1 152.9 3.1 47.4 44.9 Automobiles 27.3 0.6 46.2 0.9 18.9 69.3 Other 79.9 1.6 109.8 2.2 29.9 37.4

Raw and other materials 1984.6 40.2 2044.5 40.9 59.9 3.0 Ores 159.8 3.2 191.3 3.8 31.5 19.7 Cast-iron, iron and steel 106.7 2.2 132.1 2.6 25.4 23.8 Other metals 54.0 1.1 41.6 0.8 -12.3 -22.8 Textile materials 490.5 9.9 499.9 10.0 9.4 1.9 Wood and paper, cardboard 118.6 2.4 139.5 2.8 20.9 17.6 Chemical products 251.0 5.1 289.1 5.8 38.1 15.2 Plastics, rubber 155.8 3.2 193.8 3.9 37.9 24.3 Food feedstocks 240.4 4.9 128.3 2.6 -112.0 -46.6 Leather and furs 60.2 1.2 46.9 0.9 -13.3 -22.0 Tobacco 28.6 0.6 34.4 0.7 5.8 20.2 Other 319.1 6.5 347.6 7.0 28.5 8.9

Investment goods 857.2 17.4 1069.6 21.4 212.3 24.8 Machines, tools and appliances 356.1 7.2 384.5 7.7 28.4 8.0 Electrical machines 116.3 2.4 161.9 3.2 45.6 39.2 Transportation facilities 91.0 1.8 173.2 3.5 82.2 90.3 Spare parts and equipment 143.6 2.9 180.0 3.6 36.4 25.3 Other 150.3 3.0 170.0 3.4 19.8 13.2

Nonenergy goods, total 3356.6 68.1 3844.0 77.0 487.3 14.5

Energy resources 1575.3 31.9 1151.2 23.0 -424.1 -26.9 Fuels 1518.9 30.8 1074.5 21.5 -444.5 -29.3 Crude oil 771.2 15.6 507.6 10.2 -263.6 -34.2 Coal 169.9 3.4 163.6 3.3 -6.3 -3.7 Natural gas 483.1 9.8 318.0 6.4 -165.1 -34.2 Other 94.8 1.9 85.3 1.7 -9.5 -10.0 Other 56.4 1.1 76.7 1.5 20.3 36.0 Oils 56.4 1.1 76.7 1.5 20.3 36.0

IMPORTS, TOTAL (CIF) 4932.0 100.0 4995.2 100.0 63.2 1.3

Note: Final data for 1997, for 1998 ≠ preliminary data as of 31 March 1999.

Source: Customs declarations data received from the MF Computing Center and NSI and adjusted by the BNB.

IMPORTS BY USE

Commodity groups 1997 1998million USD share, % million USD share, % million USD %

Change onthe previous year

January ≠ December

120

EXPORTS BY MAJOR TRADING PARTNER AND REGION

Countries 1997 1998million USD share, % million USD share, % million USD %

Change onthe previous year

January ≠ December

European Union, incl.: 2135.9 43.2 2135.1 49.7 -0.8 0.0Italy 577.8 11.7 544.3 12.7 -33.5 -5.8Germany 469.0 9.5 448.7 10.5 -20.3 -4.3Greece 407.1 8.2 377.1 8.8 -30.0 -7.4Belgium 76.4 1.5 152.8 3.6 76.4 100.0France 133.5 2.7 146.9 3.4 13.4 10.0Spain 129.2 2.6 121.0 2.8 -8.2 -6.4United Kingdom 131.0 2.7 108.1 2.5 -23.0 -17.5Netherlands 75.7 1.5 79.2 1.8 3.5 4.6Austria 54.2 1.1 71.0 1.7 16.7 30.8

EFTA 44.4 0.9 35.3 0.8 -9.1 -20.5

Other OECD countries, incl.: 1 666.2 13.5 515.7 12.0 -150.5 -22.6Turkey 445.2 9.0 341.3 7.9 -104.0 -23.4USA 129.4 2.6 111.3 2.6 -18.1 -14.0Japan 39.6 0.8 33.0 0.8 -6.6 -16.8

Balkan Countries, incl.: 2 292.1 5.9 236.0 5.5 -56.2 -19.2Macedonia 98.1 2.0 98.0 2.3 -0.1 -0.1Yugoslavia 124.8 2.5 95.6 2.2 -29.2 -23.4

CEFTA, incl.: 3 138.0 2.8 208.3 4.9 70.2 50.9Poland 29.7 0.6 55.3 1.3 25.7 86.6Romania 37.5 0.8 52.8 1.2 15.3 40.8Hungary 23.4 0.5 33.3 0.8 10.0 42.7Slovenia 14.0 0.3 28.7 0.7 14.8 105.6Slovakia 15.0 0.3 22.1 0.5 7.1 47.4Czech Republic 18.6 0.4 16.0 0.4 -2.6 -14.0

Former USSR countries, incl.: 882.8 17.9 544.6 12.7 -338.2 -38.3Russia 392.6 7.9 234.1 5.5 -158.5 -40.4Ukraine 147.0 3.0 113.6 2.6 -33.4 -22.7Georgia 123.0 2.5 67.6 1.6 -55.4 -45.0

Other countries, incl.: 780.3 15.8 618.1 14.4 -162.1 -20.8Southeast Asian countries 4 97.4 2.0 30.8 0.7 -66.6 -68.4

EXPORTS, TOTAL (FOB) 4939.7 100.0 4293.0 100.0 -646.7 -13.1

1 Australia, Canada, New Zealand, USA, Turkey and Japan are included.2 Albania, Bosnia and Herzegovina, Macedonia, Croatia and Yugoslavia are included.3 As of 1 July 1997 Romania is included.4 Korea, Malaysia, Thailand, Philippines and Indonesia are included.

Note: Final data for 1997, for 1998 ≠ preliminary data as of 31 March 1999.

Source: Customs declarations data received from the MF Computing Center and NSI and adjusted by the BNB.

121

IMPORTS BY MAJOR TRADING PARTNER AND REGION

Countries 1997 1998million USD share, % million USD share, % million USD %

Change onthe previous year

January ≠ December

European Union, incl.: 1860.6 37.7 2248.4 45.0 387.8 20.8Germany 580.0 11.8 686.1 13.7 106.1 18.3Italy 353.9 7.2 385.1 7.7 31.2 8.8Greece 207.7 4.2 295.1 5.9 87.5 42.1France 158.2 3.2 227.1 4.5 69.0 43.6Austria 119.8 2.4 140.8 2.8 21.0 17.5United Kingdom 128.8 2.6 120.7 2.4 -8.0 -6.2Netherlands 91.7 1.9 102.3 2.0 10.6 11.5Belgium 62.0 1.3 88.0 1.8 26.0 41.9

EFTA, incl.: 88.4 1.8 79.6 1.6 -8.8 -10.0Switzerland 78.9 1.6 71.3 1.4 -7.7 -9.7

Other OECD countries, incl.: 1 349.2 7.1 407.0 8.1 57.8 16.6USA 184.9 3.7 197.8 4.0 12.9 7.0Turkey 102.5 2.1 131.2 2.6 28.7 28.0Japan 37.2 0.8 41.9 0.8 4.8 12.8

Balkan countries 95.8 1.9 82.3 1.6 -13.5 -14.1

CEFTA, incl.: 3 224.7 4.6 279.4 5.6 54.8 24.4Czech Republic 63.5 1.3 96.5 1.9 33.0 51.9Romania 28.0 0.6 58.2 1.2 30.2 107.9Poland 57.4 1.2 43.0 0.9 -14.4 -25.2Hungary 42.9 0.9 37.1 0.7 -5.8 -13.4Slovakia 21.2 0.4 26.4 0.5 5.3 24.9Slovenia 11.7 0.2 18.2 0.4 6.5 55.7

Former USSR countries, incl.: 1621.7 32.9 1250.0 25.0 -371.8 -22.9Russia 1382.2 28.0 1003.2 20.1 -379.0 -27.4Ukraine 182.0 3.7 193.6 3.9 11.7 6.4

Other countries, incl.: 691.6 14.0 648.5 13.0 -43.1 -6.2Iraq 43.9 0.9 58.5 1.2 14.6 33.4Southeast Asian countries 4 43.7 0.9 85.1 1.7 41.4 94.6

IMPORTS, TOTAL (CIF) 4932.0 100.0 4995.2 100.0 63.2 1.3

1 Australia, Canada, New Zealand, USA, Turkey and Japan are included.2 Albania, Bosnia and Herzegovina, Macedonia, Croatia and Yugoslavia are included.3 As of 1 July 1997 Romania is included.4 Korea, Malaysia, Thailand, Philippines and Indonesia are included.

Note: Final data for 1997, for 1998 ≠ preliminary data as of 31 March 1999.

Source: Customs declarations data received from the MF Computing Center and NSI and adjusted by the BNB.

122

BA

LA

NC

E O

F P

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ME

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1997

1998

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124

GROSS FOREIGN DEBT

(million USD)

1991 1992 1993 1994 1995 1996 1997 19981

GROSS FOREIGN DEBT (A + B)2 12247.1 13805.7 13836.4 11338.4 10148.0 9513.9 9676.6 10101.2

A. Long-term debt 2676.0 3167.0 3256.6 9267.9 8841.3 8570.2 8560.5 9263.8 Public and publicly guaranteed 2274.0 2658.0 2740.0 8755.0 8499.7 8335.0 8494.3 9125.5 Nonguaranteed 402.0 509.0 516.6 512.9 341.6 235.2 66.1 138.4 I. Official creditors 1872.0 2256.0 2338.0 3216.0 3084.6 3188.5 3271.7 4043.4 1. International financial institutions 744.0 1099.0 1157.0 1825.0 1657.1 1983.9 2241.6 2773.9 IMF 401.0 590.0 632.0 941.0 716.7 584.6 936.3 1114.5 World Bank 142.0 152.0 155.0 396.0 410.6 455.8 540.4 711.6 EU 201.0 357.0 357.0 444.0 460.6 495.5 286.4 421.8 Other international financial institutions 0.0 0.0 13.0 44.0 69.2 448.1 478.6 525.9 incl. EIB 0.0 0.0 7.0 23.0 39.2 118.5 165.3 205.9 EBRD 0.0 0.0 6.0 21.0 30.0 84.3 87.0 109.7 2. Bilateral credits 1128.0 1157.0 1181.0 1391.0 1427.5 1204.5 1030.1 1269.6 Paris Club and nonrescheduled debt 1128.0 1095.0 1100.0 1240.0 1237.6 1034.5 877.9 1044.6 Other bilateral credits 0.0 62.0 81.0 151.0 189.9 170.0 152.2 225.0 II. Private creditors 804.0 911.0 918.6 6051.9 5756.7 5381.7 5288.7 5220.4 1. Brady bonds 0.0 0.0 0.0 5137.0 5005.4 4984.0 4924.4 4946.2 2. Other bonds 402.0 402.0 402.0 402.0 409.7 147.2 80.8 34.7 3. Government securities 3 0.0 0.0 0.0 0.0 0.0 15.4 194.4 78.3 4. Commercial banks 402.0 509.0 511.0 479.0 273.3 155.9 4.4 16.8 5. Other private creditors - - 5.6 33.9 68.3 79.3 84.8 144.3B. Short-term debt 4 9571.1 10638.7 10579.8 2070.5 1306.7 943.7 1116.1 837.4

Public and publicly guaranteed 8147.0 9289.9 9550.8 1660.5 915.9 648.0 684.0 363.6 Nonguaranteed 1424.1 1348.7 1029.1 409.9 390.8 295.7 432.1 473.8 I. Official creditors 1276.0 1260.9 1235.8 1660.5 915.9 648.0 684.0 363.6 II. Private creditors 8295.1 9377.7 9344.1 409.9 390.8 295.7 432.1 473.8 1. Commercial banks 6871.0 8029.0 8315.0 26.0 201.1 184.6 265.5 281.4 2. Other private creditors 5 1424.1 1348.7 1029.1 384.0 189.7 111.1 166.6 192.4

1 Preliminary data as of 31 March 1999.2 In convertible currencies.3 Government securities denominated in foreign currency and bought by nonresidents.4 Including overdue principals and interest.5 Including nonresidentsí deposits at local commercial banks and credits extended to local physical and legal persons by nonresident private creditors.

Source: BNB, Bulbank, commercial banks, physical and legal persons reporting directly to the BNB.

FOREIGN DEBT SERVICE

(million USD)

1996 1997 19981

Total (A + B)2 1078.8 897.2 1105.4

A. Long-term debt 1022.0 806.6 1029.6

I. Official creditors 501.8 462.6 678.0 1. International financial institutions 326.7 358.1 495.2 IMF 254.0 118.7 227.6 World Bank 41.0 44.0 54.7 EU/EIB/EBRD 3 31.7 195.4 212.9 2. Bilateral credits 175.2 104.5 182.9 Paris Club and nonrescheduled debt 157.0 89.6 158.0 Other bilateral credits 18.2 14.9 24.8 II. Private creditors 520.2 344.0 351.5 Brady bonds 262.0 266.5 267.0 Other bonds 222.8 58.7 56.9 Commercial banks 27.5 2.5 0.1 Other private creditors 7.9 16.3 27.6B. Short-term debt 4 56.8 90.6 75.8

1 Preliminary data as of 31 March 1999.2 Actual payments in convertible currencies.3 Payments on the debt to EU, EIB and EBRD.4 Including payments on commercial banksí short-term debt, former Comecon creditors and other private creditors.

Source: BNB, Bulbank, commercial banks, physical and legal persons reporting directly to the BNB.

125

DEBT INDICATORS

(%)

1991 1992 1993 1994 1995 1996 1997 1998

Gross foreign debt/GDP1 161.1 160.5 130.5 118.1 78.1 101.9 95.1 82.0Gross foreign debt/exports 2 296.0 274.7 282.5 218.4 149.8 152.1 154.2 182.1Gross foreign debt service/GDP 3.2 5.1 4.0 15.1 7.5 11.6 8.8 8.9Gross foreign debt service/exports 2 5.8 8.8 8.7 27.9 14.5 17.2 14.3 19.9Short-term debt/GDP 125.9 123.7 99.8 21.6 10.1 10.1 11.0 6.8(deposits+government securities)/forex reserves 0.0 149.5 156.9 37.8 13.6 20.3 11.3 5.5Short-term debt/gross foreign debt 78.1 77.1 76.5 18.3 12.9 9.9 11.5 8.3

1 GDP projections for 1998: USD 12,325 million.2 Exports of goods and nonfactor services.

Source: BNB.

126

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budg

et t

o

mun

icip

al c

ounc

ils

reg

iona

l m

unic

ipal

cou

ncils

m

inis

trie

s an

d ot

her

gove

rnm

ent

inst

itut

ions

S

ocia

l Se

curi

ty

leg

al a

utho

riti

es

spe

cial

age

ncie

s

sta

te h

ighe

r sc

hool

s

5.3

. Gen

eral

gov

ernm

ent

budg

et c

ontr

ibut

ions

6. T

rans

fers

fro

m C

GB

to

extr

abud

geta

ry a

ccou

nts

and

fund

s 7

. Tem

pora

ry n

onin

tere

st-b

eari

ng l

oans

fro

m e

xtra

budg

etar

y ac

coun

ts a

nd f

unds

III.

Defi

cit

(-)

/ S

urp

lus (

+)

1. P

rim

ary

defi

cit/

surp

lus

Inte

rest

pai

d on

int

erna

l lo

ans

2. I

nter

nal

defi

cit

Inte

rest

pai

d on

ext

erna

l lo

ans

3. C

ash

defi

cit

2 5

60 2

88.3

2 9

83 3

20.1

116.5

17.4

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17 1

26.9

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45 5

66.7

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8.7

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94

245

566.

712

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9.2

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732.

1-5

1.5

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(con

tinu

ed)

Indi

cato

rsR

epor

ting

SBL

,as

of

31 D

ec.,

% o

f%

of

mill

ion

BG

Lm

illio

n B

GL

SBL

GD

P

1997

1998

Rep

orti

ngSB

L,

as o

f 31

Dec

.,%

of

% o

fm

illio

n B

GL

mill

ion

BG

LSB

LG

DP

127

(con

tinu

ed)

IV.

Cash

defi

cit

fin

an

cin

g

1. F

orei

gn f

inan

cing

(op

erat

ions

abr

oad)

1.

1. E

xter

nal

loan

s an

d E

urob

onds

1.

2. R

epay

men

ts o

n cr

edit

s ex

tend

ed t

o ot

her

coun

trie

s

1.3.

Rep

aym

ents

on

exte

rnal

loa

ns

1.4.

Ove

rdue

pay

men

ts

1.5.

Rep

aym

ents

on

trad

e de

fici

t in

tra

nsfe

rabl

e ro

uble

s

w

ith

form

er C

omec

on c

ount

ries

1.

6. L

ev b

ills

2. D

omes

tic

fina

ncin

g2.

1. O

pera

tion

s in

gov

ernm

ent

secu

riti

es (

net)

Is

sue

of g

over

nmen

t se

curi

ties

in

the

curr

ent

year

, net

I

ssue

of

trea

sury

bill

s

Iss

ue o

f bo

nds

R

epay

men

t of

gov

ernm

ent

secu

riti

es i

n th

e cu

rren

t ye

ar ≠

tot

al

R

epay

men

t of

gov

ernm

ent

secu

riti

es i

ssue

d in

the

cur

rent

yea

r

R

epay

men

t of

gov

ernm

ent

secu

riti

es i

ssue

d in

pre

viou

s ye

ars

2.2.

Ban

k fi

nanc

ing,

net

B

NB

, ne

t

L

ong-

term

loa

ns

R

epay

men

ts o

n lo

ng-t

erm

loa

ns

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empo

rary

loa

ns

R

epay

men

ts o

n te

mpo

rary

loa

ns

L

oans

fro

m B

NB

und

er A

rtic

le 4

5 of

LB

NB

R

epay

men

ts o

n cr

edit

s fr

om S

SB (

SII)

2.3.

Dep

osit

s, n

et

ba

lanc

es f

rom

pas

t pe

riod

s

ba

lanc

es o

n ac

coun

ts b

y en

d of

per

iod

b

udge

t de

posi

t in

lev

s

tim

e de

posi

t in

lev

s

for

ex b

udge

t de

posi

t (l

ev e

quiv

alen

t)2.

4. O

ther

fin

anci

ng

Loa

ns t

o bu

dget

fro

m S

FR

D,

net

Loa

ns t

o bu

dget

fro

m S

FR

D

R

epay

men

ts o

n lo

ans

from

SF

RD

2.5.

For

eign

cur

renc

y re

valu

atio

n2.

6. R

even

ue f

rom

pri

vati

zati

on

Note

s: 1

. The

info

rmat

ion

on c

ash

basi

s re

port

ing

of th

e ce

ntra

l gov

ernm

ent b

udge

t is

base

d on

the

cabl

e ac

coun

tanc

y re

ceiv

ed b

y co

mm

erci

al b

anks

and

the

BN

B a

nd is

cla

ssif

ied

acco

rdin

g to

the

met

hod

appl

ied

by th

e M

F.

2. A

lloca

tion

of e

xpen

ditu

re p

roje

cted

by

the

SBL

is b

ased

on

MF

dat

a.

Sour

ce:

BN

B.

936 5

85.0

666 6

87.7

71.2

3.9

610 8

25.9

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32.1

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247.

8-2

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11.

2-4

48 5

76.5

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cato

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ec.,

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mill

ion

BG

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illio

n B

GL

SBL

GD

P

1997

1998

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orti

ngSB

L,

as o

f 31

Dec

.,%

of

% o

fm

illio

n B

GL

mill

ion

BG

LSB

LG

DP

128

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8 15

4.8

32.4

8 06

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1.8

37.5

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9.8

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20.

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rev

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exp

endi

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nsfe

rs f

rom

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gene

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gove

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ent

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Rep

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alan

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on l

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alan

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ts

T

empo

rary

non

inte

rest

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ns

f

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dget

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acco

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R

even

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pri

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on

For

eign

cur

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y re

valu

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n

CO

NS

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IDA

TE

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TA

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BU

DG

ET

Con

soli

date

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Bud

get

Gen

eral

Gov

ernm

ent

Bud

get

Leg

al I

nsti

tuti

ons

Indi

cato

rs31

Dec

embe

r 19

9731

Dec

embe

r 19

9831

Dec

embe

r 19

9731

Dec

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r 19

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Dec

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Dec

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Rep

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e%

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ng,

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e%

of

mil

lion

BG

LG

DP

mil

lion

BG

LG

DP

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lion

BG

LG

DP

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lion

BG

LG

DP

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lion

BG

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lion

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DP

129

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130

I. DEBT ON GOVERNMENT SECURITIES ISSUED FOR BUDGET DEFICIT FINANCING

1. Government securities issued in 1994 1 017.1 1 017.1 5-year 1 017.1 1 017.12. Government securities issued in 1995 14 685.9 6 311.6 incl. 3-year 8 374.3 0.0 5-year 6 286.6 6 286.6 9-year* 25.0 25.03. Government securities issued in 1996 14 193.6 6 491.5 incl. 2-year 7 702.0 0.0 3-year 5 645.8 5 645.8 5-year 845.8 845.84. Government securities issued in 1997 777 820.5 114 221.9 4.1. Short-term 663 598.6 0.0 incl. 3-month 65 057.7 0.0 6-month 189 388.8 0.0 9-month 33 846.4 0.0 12-month 375 305.7 0.0 4.2. Medium-term 114 221.9 114 221.9 incl. 2-year 30010.6 30 010.6 3-year 64 211.3 64 211.3 5-year 20 000.0 20 000.05. Government securities issued in 1998 0.0 621 851.9 5.1. Short-term 0.0 541 404.1 incl. 28-day* 0.0 3-month 63 735.0 6-month 168 669.2 12-month 308 999.8 5.2. Medium-term 0.0 80 447.9 incl. 2-year 72 979.3 3-year 3 377.6 5-year 4 090.9

Total (I) 807 717.0 749 893.9

II. DIRECT DEBT TO FINANCIAL INSTITUTIONS

1. Bulgarian National Bank 1 619 136.2 1 665 948.7 debt issued in SDR as per ß 10 of the Transitional and Final Provisions of LBNB of 1997 450.4 315.8 long-term credits under Article 45 of LBNB of 1997 224.4 391.2 lev equivalent of SDR total 1 619 136.2 665 948.7 (SDR 1 = BGL 2 356.480427)2. State Savings Bank 1011.9 0.0

TOTAL (II) 1 620 148.1 1 665 948.7

III. DEBT ON OTHER GOVERNMENT SECURITIES ISSUED FOR STRUCTURAL REFORM

¿1. Long-term government bonds issued pursuant to CM Decree No. 244 of 1991 3 852.4 3 577.3¿2. Long-term government bonds issued pursuant to CM Decree No. 234 of 1992 2 802.9 2 429.8¿3. Long-term government bonds issued pursuant to Articles 4 and 5 of ZUNK of 1993 in BGL 12 920.2 8 786.0 denominated in USD 810.5 669.4 (in BGL at current exchange rate) 1 439 787.2 1 121 291.8¿4. Long-term government bonds issued pursuant to CM Decree No. 3 of 1994 931.3 931.3

Total (A) 1 460 294.0 1 137 016.2

B1. Government bonds issued pursuant to Article 2 of CM Decree No. 89 of 1995 22320.3 9320.3 Issue No. 200 (7-year) 9 320.3 9 320.3 Issue No. 201 (7-year) 13 000.0 0.0B2. Government bonds issued pursuant to CM Decree No. 193 of 1995 2 600.0 0.0 Issue No. 202 (5-year) 1 176.0 0.0 Issue No. 203 (3-year) 1 000.0 0.0 Issue No. 204 (4-year) 424.0 0.0B3. USD-denominated government bonds issued pursuant to CM Decree No. 145 of 1997 88825.0 0.0 Issue No. 300 (18-month) 50.0 0.0 (in BGL at current exchange rate) 88 825.0 0.0

TOTAL (B) 113 745.3 9320.3

DOMESTIC GOVERNMENT DEBT AND GOVERNMENT GUARANTEED DEBT BY DEBT INSTRUMENT

(million BGL)

(continued)

Amount as of31 December

1997

Amount as of31 December

1998Structure

131

C. Government bonds issued pursuant to Articles 8 and 9 ofLaw on State Protection of Deposits and Accounts of 1996 in BGL 96 425.0 73 901.5 Issue No. 402 (7-year) 5 142.9 4 285.7 Issue No. 403 (7-year) 5 433.2 4 527.6 Issue No. 404 (7-year) 5 137.1 0.0 Issue No. 405 (7-year) 679.8 566.5 Issue No. 406 (7-year) 15.6 0.0 Issue No. 407 (7-year) 26.2 0.0 Issue No. 418 (7-year) 9 931.6 0.0 Issue No. 432 (7-year) 2 668.9 0.0 Issue No. 443 (7-year) 2 9581.8 25 355.8 Issue No. 473 (7-year) 3 262.7 2 796.6 Issue No. 474 (7-year) 9 425.2 8 078.7 Issue No. 475 (7-year) 10 630.4 9111.7 Issue No. 476 (7-year) 14 489.7 12419.7 Issue No. 400 (7-year) 3 425.7 Issue No. 402 (7-year) 3 198.0 Issue No. 403 (7-year) 135.4 denominated in USD 301 364.9 292 048.7 Issue No. 314 (3-year) 50.0 50.0 (in BGL at current exchange rate) 88 825.0 83 755.0 Issue No. 315 (3-year) 28.2 28.2 (in BGL at current exchange rate) 50 010.8 47 156.2 Issue No. 329 (3-year) 1.0 1.0 (in BGL at current exchange rate) 1 694.4 1 597.7 Issue No. 400 (3-year) 8.9 8.9 (in BGL at current exchange rate) 15 733.7 14 835.7 Issue No. 456 (3-year) 2.0 2.0 (in BGL at current exchange rate) 3 630.3 3 423.1 Issue No. 472 (3-year) 48.9 48.9 (in BGL at current exchange rate) 86 806.4 81 851.6 Issue No. 477 (3-year) 23.3 23.3 (in BGL at current exchange rate) 41 439.2 39 073.9 Issue No. 478 (3-year) 5.3 5.3 (in BGL at current exchange rate) 9 491.0 8 949.2 Issue No. 402 (3-year) 1.4 1.4 (in BGL at current exchange rate) 2 562.6 2 416.3 Issue No. 403 (3-year) 0.7 0.7 (in BGL at current exchange rate) 1 171.6 1 104.7 Issue No. 401 (3-year) 0.5 (in BGL at current exchange rate) 857.7 Issue No. 404 (3-year) 3.1 (in BGL at current exchange rate) 5 240.7 Issue No. 405 (3-year) 0.1 (in BGL at current exchange rate) 89.6 Issue No. 406 (3-year) 1.0 (in BGL at current exchange rate) 1 697.2

TOTAL (C) 397 789.9 365 950.2

TOTAL (III) 1 971 829.2 1 512 286.7

GOVERNMENT DEBT TOTAL 4 399 694.3 3 928 129.3

GOVERNMENT GUARANTEED DEBT

DOMESTIC GOVERNMENT GUARANTEES 0.0 839 564.8

TOTAL DOMESTIC GOVERNMENT AND

GOVERNMENT GUARANTEED DEBT 4 399 694.3 4 767 694.1

* MF securitized direct debt to the BNB.

Source: BNB and MF.

(continued) (million BGL)

Amount as of31 December

1997

Amount as of31 December

1998Structure

132

FOREIGN GOVERNMENT DEBT BY DEBT INSTRUMENT AS OF 31 DECEMBER 1998

(million USD)

I. Government Debt 7 674.54 1. LONG-TERM GOVERNMENT SECURITIES 5 012.14

1.1. Brady bonds 4 977.411.2. Other 34.73

2. LONG-TERM CREDITS 2 662.402.1. Paris Club 1 044.552.2. World Bank 565.302.3. G≠24 89.532.4. EU 421.852.5. Other 541.17

II. Government Guaranteed Debt 604.18incl. IMF 120.00

DEBT, TOTAL 8 278.72

Notes: 1. Data is in accordance with the BNB register of government and government guaranteed debts based on MF information on loan agreements ratified by theNational Assembly.

2. Excluding overdue interest on obligations to IIB and IBEC creditors, as well as data on domestic debt instruments bought by nonresidents. 3. USD equivalent is based on central exchange rates of the relevant currencies against BGL quoted by the BNB on 30 December 1998.

Source: BNB and MF.

PAYMENTS ON FOREIGN GOVERNMENT DEBT BY SOURCE

(million USD)

Principal Interest Total

1. General government budget 152.2 342.8 495.02. SFRD 244.3 43.6 287.93. End-borrowers 29.7 27.1 56.8 (government guaranteed debt)

Total 426.2 413.5 839.7

Note: USD equivalent of the payments is based on the central exchange rate quoted by the BNB for the relevant foreign currencies valid by the end of each monthof the respective payment.

Source: MF and BNB.

PAYMENTS ON FOREIGN GOVERNMENT DEBT BY CREDITOR

(million USD)

GOVERNMENT DEBT STRUCTURE Principal Interest Total

I. Government Debt 337.9 386.4 724.3

1. Long-term government securities 52.9 271.1 324.0 1.1. Brady bonds 267.0 267.0 1.2. Other 52.9 4.1 57.02. Long-term credits 285.0 115.3 400.3 2.1. Paris Club 98.1 59.9 158.0 2.2. World Bank 14.1 29.3 43.4 2.3. G≠24 3.4 4.7 8.1 2.4. EU 162.4 11.7 174.1 2.5. Other 7.0 9.6 16.6

II. Government Guaranteed Debt 88.3 27.1 115.4

Payments, Total 426.2 413.5 839.7

Note: USD equivalent of the payments is based on the central exchange rate quoted by the BNB for the relevant foreign currencies valid by the end of each monthof the respective payment.

Source: MF and BNB.

133

BA

LA

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134

(continued)

MONETARY SURVEY

(million BGL)

XIIí97 Ií98 IIí98 IIIí98 IVí98 Ví98 VIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation liquidation

1776.5 1776.5 1809.2 1809.2 1820.2 1820.2 1834.0 1834.0 1798.0 1798.0 1782.4 1782.4 1810.2 1810.21000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0

4950218 -354711 4865301 -359072 5289002 -359895 5518586 -344621 5374302 -369629 5426207 -371420 5658682 -3667867803024 138884 7673946 140799 8160190 141280 8240300 140646 8072461 113800 8400490 110137 8611722 1131684395322 0 4172053 0 4558856 0 4713688 0 4701067 0 5130536 0 5244427 03407702 138884 3501893 140799 3601334 141280 3526612 140646 3371394 113800 3269954 110137 3367295 113168

2852806 493595 2808645 499871 2871188 501175 2721714 485267 2698159 483429 2974283 481557 2953040 479954

1068369 574772 1017632 562533 610382 559417 439289 516670 584713 531694 457966 532958 386713 531240

5136474 1562848 5262162 1573632 4898765 1528092 4672939 1413353 4339261 1272242 4224532 1252080 4169032 11854471035600 22253 815019 -66643 721695 -76456 665188 -119033 560860 -136460 607792 -137543 728341 -1424654100874 1540595 4447143 1640275 4177070 1604548 4007751 1532386 3778401 1408702 3616740 1389623 3440691 1327912

1641560 -255616 1671826 -276617 1290354 -277830 1165965 -285472 919156 -287251 740919 -287041 757471 -292119104055 -95295 -151306 -183778 -289967 -191496 -372830 -223218 -545963 -226116 -546070 -226457 -420100 -229884

1537505 -160321 1823132 -92839 1580321 -86334 1538795 -62254 1465119 -61135 1286989 -60584 1177571 -62235

1708950 -254843 1746855 -275839 1358945 -277050 1262254 -284665 1019238 -286451 848570 -286244 867138 -291317168713 -94846 -79378 -183329 -224195 -191047 -279741 -222748 -449180 -225646 -441558 -225987 -312478 -229414

1540237 -159997 1826233 -92510 1583140 -86003 1541995 -61917 1468418 -60805 1290128 -60257 1179616 -61903

2560441 -249502 2325231 -270440 1841209 -271633 1685793 -279194 1503533 -281048 1410862 -280859 1425023 -285901489129 -92638 191661 -181121 57397 -188839 -46170 -220535 -127911 -223433 -47551 -223774 61856 -227201

2071312 -156864 2133570 -89319 1783812 -82794 1731963 -58659 1631444 -57615 1458413 -57085 1363167 -587004142728 119518 4168845 112946 4209668 112710 4061649 113219 4034316 111201 4010916 110265 3980509 111561

872653 9993 913681 10794 939005 9949 966229 9667 987549 9681 979337 9626 903078 93523270075 109525 3255164 102152 3270663 102761 3095420 103552 3046767 101520 3031579 100639 3077431 1022092271523 104216 2378586 106809 2397162 107367 2280642 107853 2303949 105889 2310791 104976 2300258 106229

570509 5334 621609 6135 642102 6115 649895 5833 662682 5842 663630 5784 588616 5513498520 0 526188 0 532038 0 550325 0 557578 0 557482 0 562174 0134834 0 143707 0 147232 0 152163 0 161757 0 165332 0 164372 0363686 0 382481 0 384806 0 398162 0 395821 0 392150 0 397802 0

1202494 98882 1230789 100674 1223022 101252 1080422 102020 1083689 100047 1089679 99192 1149468 10071690040 1489 125827 1489 118259 1476 120580 1476 123749 1476 117297 1476 114053 1476

1112454 97393 1104962 99185 1104763 99776 959842 100544 959940 98571 972382 97716 1035415 992401633140 0 1633906 0 1643412 0 1608840 0 1576684 0 1549889 0 1528491 0

1012 0 991 0 970 0 0 0 0 0 0 0 0 01632128 0 1632915 0 1642442 0 1608840 0 1576684 0 1549889 0 1528491 0

238065 15302 156353 6137 169094 5343 172167 5366 153683 5312 150236 5289 151760 533276258 3170 21547 3170 30442 2358 43591 2358 39361 2363 33078 2366 36037 2363

161807 12132 134806 2967 138652 2985 128576 3008 114322 2949 117158 2923 115723 2969

-1582287 -369020 -1843614 -383386 -2368459 -384343 -2375856 -392413 -2530783 -392249 -2600054 -391124 -2555486 -397462-383524 -102631 -722020 -191915 -881608 -198788 -1012399 -230202 -1115460 -233114 -1026888 -233400 -841222 -236553

-1198763 -266389 -1121594 -191471 -1486851 -185555 -1363457 -162211 -1415323 -159135 -1573166 -157724 -1714264 -160909

-851491 -5341 -578376 -5399 -482264 -5417 -423539 -5471 -484295 -5403 -562292 -5385 -557885 -5416-320416 -2208 -271039 -2208 -281592 -2208 -233571 -2213 -321269 -2213 -394007 -2213 -374334 -2213-531075 -3133 -307337 -3191 -200672 -3209 -189968 -3258 -163026 -3190 -168285 -3172 -183551 -3203

11 0 12 0 25 0 29 0 15 0 16 0 16 011 0 12 0 25 0 29 0 15 0 16 0 16 0

-851502 -5341 -578388 -5399 -482289 -5417 -423568 -5471 -484310 -5403 -562308 -5385 -557901 -5416-320427 -2208 -271051 -2208 -281617 -2208 -233600 -2213 -321284 -2213 -394023 -2213 -374350 -2213-531075 -3133 -307337 -3191 -200672 -3209 -189968 -3258 -163026 -3190 -168285 -3172 -183551 -3203

-67390 -773 -75029 -778 -68591 -780 -96289 -807 -100082 -800 -107651 -797 -109667 -802-64658 -449 -71928 -449 -65772 -449 -93089 -470 -96783 -470 -104512 -470 -107622 -470-2732 -324 -3101 -329 -2819 -331 -3200 -337 -3299 -330 -3139 -327 -2045 -332

3 1 4 1 3 1 4 1 3207 1 3532 1 6940 13 1 4 1 3 1 4 1 3207 1 3532 1 5765 10 0 0 0 0 0 0 0 0 0 0 0 1175 0

-67393 -774 -75033 -779 -68594 -781 -96293 -808 -103289 -801 -111183 -798 -116607 -803-64661 -450 -71932 -450 -65775 -450 -93093 -471 -99990 -471 -108044 -471 -113387 -471-2732 -324 -3101 -329 -2819 -331 -3200 -337 -3299 -330 -3139 -327 -3220 -332

Exchange rate: BGL/1 USD BGL/1 DEM

FOREIGN ASSETS (net) Foreign assets BNB international reserves Other foreign assets

Less: foreign liabilities

NET DOMESTIC ASSETS

DOMESTIC CREDIT BGL Foreign currencies

CLAIMS ON GOVERNMENTSECTOR (net) BGL Foreign currencies

CLAIMS ON GOVERNMENT (net) BGL Foreign currencies

CLAIMS ON STATE BUDGET (net) BGL Foreign currencies Claims on government BGL Foreign currencies Government securities Short-term (up to 12 months) Medium-term (up to 5 years) BGL Foreign currencies Long-term (over 5 years) BGL Foreign currencies Credits BGL Foreign currencies Other claims BGL Foreign currencies

Less: government deposits BGL Foreign currencies

CLAIMS ON STATE FUNDS AND EXTRABUDGETARY ACCOUNTS (net) BGL Foreign currencies Claims on state funds and extrabudgetary accounts BGL Less: deposits of state funds and extrabudgetary accounts BGL Foreign currencies

CLAIMS ON LOCAL BUDGETS (net) BGL Foreign currencies Claims on local budgets BGL Foreign currencies Less: deposits of local budgets BGL Foreign currencies

135

(continued) (million BGL)

XIIí97 Ií98 IIí98 IIIí98 IVí98 Ví98 VIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation liquidation

(continued)

3494914 1818464 3590336 1850249 3608411 1805922 3506974 1698825 3420105 1559493 3483613 1539121 3411561 1477566931545 117548 966325 117135 1011662 115040 1038018 104185 1106823 89656 1153862 88914 1148441 87419

2563369 1700916 2624011 1733114 2596749 1690882 2468956 1594640 2313282 1469837 2329751 1450207 2263120 1390147

1254051 554420 1276389 563494 1238927 537846 1128083 475457 1107189 454502 1096023 447684 974372 421425336204 28566 336883 28368 326411 27358 306286 26681 314968 24530 309399 24391 248865 23516917847 525854 939506 535126 912516 510488 821797 448776 792221 429972 786624 423293 725507 397909

1982195 1180998 2036633 1202503 2066689 1186767 2056713 1156972 1947343 1042928 1986605 1030350 2000210 994688419962 78132 436493 77917 463787 76835 488051 75768 504062 63557 520164 62972 537066 62355

1562233 1102866 1600140 1124586 1602902 1109932 1568662 1081204 1443281 979371 1466441 967378 1463144 932333169620 2184 186998 2202 215118 2172 247630 2229 292129 2167 328475 2024 364951 967163405 221 180812 221 208854 218 241302 160 285725 140 322221 122 359333 119

6215 1963 6186 1981 6264 1954 6328 2069 6404 2027 6254 1902 5618 848

89048 80862 90316 82050 87677 79137 74548 64167 73444 59896 72510 59063 72028 6048611974 10629 12137 10629 12610 10629 2379 1576 2068 1429 2078 1429 3177 142977074 70233 78179 71421 75067 68508 72169 62591 71376 58467 70432 57634 68851 59057

-4068105 -988076 -4244530 -1011099 -4288383 -968675 -4233650 -896683 -3754548 -740548 -3766566 -719122 -3782319 -654207-3816085 -962252 -4104344 -1058730 -4150034 -1031292 -4096318 -951365 -3623246 -831186 -3606376 -815354 -3609570 -754798

-252017 -25817 -140213 47636 -138327 62622 -137310 54676 -131281 90642 -160152 96233 -172712 100606

-1268620 488580 -1365782 503379 -1472573 510173 -1623716 518808 -1455884 529161 -1459767 513314 -1151458 914600-1369456 -127680 -1364391 -154472 -1490085 -154600 -1598350 -192911 -1658098 -203763 -1812453 -203583 -2038183 -203516

100836 616260 -1391 657851 17512 664773 -25366 711719 202214 732924 352686 716897 886725 1118116

-2799482 -1476649 -2878775 -1514473 -2815788 -1478843 -2609912 -1415497 -2298643 -1269705 -2306761 -1232435 -2630824 -1568792

6018587 220061 5882933 203461 5899384 199522 5957875 172049 5959015 162065 5884173 161538 6045395 1644543394500 34668 3096380 57957 3125224 57952 3271642 54953 3285784 77040 3217202 78068 3385976 802792624087 185393 2786553 145504 2774160 141570 2686233 117096 2673231 85025 2666971 83470 2659419 84175

2290316 23429 1977498 44277 1985491 44273 2097489 43484 2119751 63252 2082274 67251 2229810 70120

1314106 0 1203366 0 1243725 0 1285373 0 1305105 0 1323723 0 1416209 0976210 23429 774132 44277 741766 44273 812116 43484 814646 63252 758551 67251 813601 70120451456 8015 340573 25963 346683 25966 376951 25342 391890 42994 359477 44943 359605 47958440604 15006 359133 17101 331082 17094 363346 17022 351470 19128 330339 19038 380823 18926

44089 120 42245 899 43893 899 44718 797 44710 794 47677 840 50689 80640061 288 32181 314 20108 314 27101 323 26576 336 21058 2430 22484 2430

5750728 211954 5622464 195312 5626632 191349 5605593 164405 5635697 154584 5554316 154123 5688708 157093

3460412 188525 3644966 151035 3641141 147076 3508104 120921 3515946 91332 3472042 86872 3458898 86973804923 8776 818027 10788 832207 10787 829887 10224 831950 12951 792605 10004 788770 9473

43600 892 35407 894 40213 917 45071 783 61277 614 35995 595 32177 57537622 3206 41553 5202 40846 5178 44883 5042 43364 7177 40492 6325 35118 6328

691386 4519 703869 4533 709133 4533 712412 4239 701316 2911 692078 2929 693614 241432315 159 37198 159 42015 159 27521 160 25993 2249 24040 155 27861 156

226923 2090 228600 2253 234333 2253 238431 576 241087 202 243673 202 253545 92

2428566 177659 2598339 137994 2574601 134036 2439786 110121 2442909 78179 2435764 76666 2416583 77408603207 99625 647079 82913 608600 83561 496093 68334 500346 40244 481145 39019 466619 40575469270 28780 519844 24855 482407 21722 462519 19411 478018 18277 511256 18122 482303 18684

1267165 34128 1323657 15107 1337532 13545 1349102 7054 1336685 6970 1331341 6948 1358961 537788924 15126 107759 15119 146062 15208 132072 15322 127860 12688 112022 12577 108700 12772

6018587 220061 5882933 203461 5899384 199522 5957875 172049 5959015 162065 5884173 161538 6045395 1644544476 149 4537 149 4702 149 4661 149 4723 159 4646 159 4527 1594446 149 4509 149 4677 149 4638 149 4682 159 4589 159 4421 159

30 0 28 0 25 0 23 0 41 0 57 0 106 0263383 7958 255932 8000 268050 8024 347621 7495 318595 7322 325211 7256 352160 7202

67892 224 67746 490 68516 490 101197 520 88314 476 94061 452 109430 435195491 7734 188186 7510 199534 7534 246424 6975 230281 6846 231150 6804 242730 6767

CLAIMS ON NONGOVERNMENT SECTOR BGL Foreign currencies Claims on nonfinancial state-owned enterprises BGL Foreign currencies Claims on private enterprises BGL Foreign currencies Claims on the public BGL Foreign currencies Claims on nonbank financial institutions BGL Foreign currencies

OTHER ITEMS (net) BGL Foreign currencies

Own funds Capital and reserves Financial result

Other assets and liabilities (net)

BROAD MONEY Ã3 BGL Foreign currencies

MONEY M1

Money outside banks Demand deposits (in BGL) State-owned enterprises Private enterprises Public Nonbank financial institutions

MONEY Ã2 (Ã1 + quasi-money)

Quasi-money Time deposits (in BGL) State-owned enterprises Private enterprises Public Nonbank financial institutions

Savings deposits (in BGL)

Foreign currency deposits State-owned enterprises Private enterprises Public Nonbank financial institutions

MONEY Ã3 (Ã2 + Money market instruments and restricted deposits) Money market instruments BGL Foreign currencies Import and restricted deposits BGL Foreign currencies

136

(continued)

(continued) (million BGL)

VIIí98 VIIIí98 IXí98 Xí98 XIí98 XIIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation

1769.0 1769.0 1791.8 1791.8 1673.2 1673.2 1647.5 1647.5 1702.6 1702.6 1675.1 1675.11000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0

5601891 -368164 5693748 -364223 5124109 -366766 5245757 -376656 5343769 -377811 5498976 -3812318489542 111035 8563914 115628 7907627 110369 7974256 104486 8240025 103923 8344235 1021885149886 0 4922665 0 4665441 0 4683472 0 4821899 0 5119371 03339656 111035 3641249 115628 3242186 110369 3290784 104486 3418126 103923 3224864 102188

2887651 479199 2870166 479851 2783518 477135 2728499 481142 2896256 481734 2845259 483419

528981 526395 573286 523929 940134 523040 754223 529225 831089 531953 1098197 532940

4207370 1153955 4280122 1115031 4481079 1043067 4311175 1031888 4565380 1046099 4227011 997188702775 -115586 670954 -118912 837108 -96317 864063 -88930 1048911 -43336 1359358 -84861

3504595 1269541 3609168 1233943 3643971 1139384 3447112 1120818 3516469 1089435 2867653 1082049

771273 -294397 773677 -312300 939683 -305845 730063 -304620 879730 -307728 509786 -342404-517366 -209595 -616109 -216427 -585295 -214982 -640770 -214826 -510838 -215634 -221829 -2141431288639 -84802 1389786 -95873 1524978 -90863 1370833 -89794 1390568 -92094 731615 -128261

892510 -293602 900921 -311505 1063313 -305071 876604 -303849 1026618 -306948 567249 -341628-401031 -209125 -493662 -215966 -466176 -214521 -498984 -214365 -366721 -215173 -165774 -2136821293541 -84477 1394583 -95539 1529489 -90550 1375588 -89484 1393339 -91775 733023 -127946

1466117 -288232 1443075 -306100 1565703 -299854 1427095 -298672 1534760 -301681 1150955 -337793-1831 -206912 -128451 -213752 -90719 -212307 -113697 -212151 -20311 -212959 228179 -212866

1467948 -81320 1571526 -92348 1656422 -87547 1540792 -86521 1555071 -88722 922776 -1249273876988 109172 4032207 112098 3900993 105289 3747267 103725 3891527 106625 3322729 67564883741 9290 893841 10928 909324 10816 886729 10703 880602 10492 838064 10287

2993247 99882 3138366 101170 2991669 94473 2860538 93022 3010925 96133 2484665 572772277872 103914 2365224 106775 2314365 100157 2106643 98632 2105095 101428 1580395 62446579505 5457 585900 7122 599195 7006 563723 6890 550343 6665 527620 6494562580 0 569495 0 544750 0 463954 0 474192 0 465302 0168203 0 170034 0 171603 0 177416 0 178086 0 178519 0394377 0 399461 0 373147 0 286538 0 296106 0 286783 0

1135787 98457 1209829 99653 1170420 93151 1078966 91742 1080560 94763 587473 55952116159 1476 111015 1422 107916 1422 101254 1422 100639 1422 94635 1422

1019628 96981 1098814 98231 1062504 91729 977712 90320 979921 93341 492838 545301469379 0 1526724 0 1443612 0 1545961 0 1688595 0 1665949 0

0 0 0 0 0 0 0 0 0 0 0 01469379 0 1526724 0 1443612 0 1545961 0 1688595 0 1665949 0129737 5258 140259 5323 143016 5132 94663 5093 97837 5197 76385 5118

19874 2357 26892 2384 30610 2388 44336 2391 51534 2405 37290 2371109863 2901 113367 2939 112406 2744 50327 2702 46303 2792 39095 2747

-2410871 -397404 -2589132 -418198 -2335290 -405143 -2320172 -402397 -2356767 -408306 -2171774 -405357-885572 -216202 -1022292 -224680 -1000043 -223123 -1000426 -222854 -900913 -223451 -609885 -223153

-1525299 -181202 -1566840 -193518 -1335247 -182020 -1319746 -179543 -1455854 -184855 -1561889 -182204

-573607 -5370 -542154 -5405 -502390 -5217 -550491 -5177 -508142 -5267 -583706 -3835-399200 -2213 -365211 -2214 -375457 -2214 -385287 -2214 -346410 -2214 -393953 -816-174407 -3157 -176943 -3191 -126933 -3003 -165204 -2963 -161732 -3053 -189753 -3019

17 0 18 0 15 0 23 0 29 0 81 017 0 18 0 15 0 23 0 29 0 81 0

-573624 -5370 -542172 -5405 -502405 -5217 -550514 -5177 -508171 -5267 -583787 -3835-399217 -2213 -365229 -2214 -375472 -2214 -385310 -2214 -346439 -2214 -394034 -816-174407 -3157 -176943 -3191 -126933 -3003 -165204 -2963 -161732 -3053 -189753 -3019

-121237 -795 -127244 -795 -123630 -774 -146541 -771 -146888 -780 -57463 -776-116335 -470 -122447 -461 -119119 -461 -141786 -461 -144117 -461 -56055 -461

-4902 -325 -4797 -334 -4511 -313 -4755 -310 -2771 -319 -1408 -3159125 1 10805 1 13049 1 13613 1 17211 1 17052 19125 1 10805 1 13049 1 13613 1 17211 1 17052 1

0 0 0 0 0 0 0 0 0 0 0 0-130362 -796 -138049 -796 -136679 -775 -160154 -772 -164099 -781 -74515 -777-125460 -471 -133252 -462 -132168 -462 -155399 -462 -161328 -462 -73107 -462

-4902 -325 -4797 -334 -4511 -313 -4755 -310 -2771 -319 -1408 -315

Exchange rate: BGL/1 USD BGL/1 DEM

FOREIGN ASSETS (net) Foreign assets BNB international reserves Other foreign assets

Less: foreign liabilities

NET DOMESTIC ASSETS

DOMESTIC CREDIT BGL Foreign currencies

CLAIMS ON GOVERNMENTSECTOR (net) BGL Foreign currencies

CLAIMS ON GOVERNMENT (net) BGL Foreign currencies

CLAIMS ON STATE BUDGET (net) BGL Foreign currencies Claims on government BGL Foreign currencies Government securities Short-term (up to 12 months) Medium-term (up to 5 years) BGL Foreign currencies Long-term (over 5 years) BGL Foreign currencies Credits BGL Foreign currencies Other claims BGL Foreign currencies

Less: government deposits BGL Foreign currencies

CLAIMS ON STATE FUNDS AND EXTRABUDGETARY ACCOUNTS (net) BGL Foreign currencies Claims on state funds and extrabudgetary accounts BGL Less: deposits of state funds and extrabudgetary accounts BGL Foreign currencies

CLAIMS ON LOCAL BUDGETS (net) BGL Foreign currencies Claims on local budgets BGL Foreign currencies Less: deposits of local budgets BGL Foreign currencies

137

(continued) (million BGL)

VIIí98 VIIIí98 IXí98 Xí98 XIí98 XIIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation

3436097 1448352 3506445 1427331 3541396 1348912 3581112 1336508 3685650 1353827 3717225 13395921220141 94009 1287063 97515 1422403 118665 1504833 125896 1559749 172298 1581187 1292822215956 1354343 2219382 1329816 2118993 1230247 2076279 1210612 2125901 1181529 2136038 1210310

951956 413466 968193 431847 930332 389984 922381 378408 940905 385355 945596 380160237350 28894 253114 34001 277275 34169 306185 34114 286991 34052 299935 34042714606 384572 715079 397846 653057 355815 616196 344294 653914 351303 645661 346118

2006125 974833 2058406 965375 2098601 930705 2143470 931891 2224783 941458 2253167 932790580516 63575 597631 62020 675319 83003 722893 90290 793560 136757 801681 93613

1425609 911258 1460775 903355 1423282 847702 1420577 841601 1431223 804701 1451486 839177406819 910 436835 771 473524 736 478474 713 480659 710 480491 600398306 111 431910 117 466849 116 472757 115 474879 112 476006 109

8513 799 4925 654 6675 620 5717 598 5780 598 4485 491

71197 59143 43011 29338 38939 27487 36787 25496 39303 26304 37971 260423969 1429 4408 1377 2960 1377 2998 1377 4319 1377 3565 1518

67228 57714 38603 27961 35979 26110 33789 24119 34984 24927 34406 24524

-3678389 -627560 -3706836 -591102 -3540945 -520027 -3556952 -502663 -3734291 -514146 -3128814 -464248-3494093 -683946 -3507155 -659472 -3387780 -583777 -3397055 -567956 -3590774 -580542 -2980225 -530628

-184295 56369 -199697 68366 -153149 63744 -159863 65302 -143498 66394 -148550 66393

-1118267 930901 -900075 1052698 -884998 1062038 -944419 1064367 -1053085 1002536 -1076050 975025-2041566 -202941 -2031812 -201131 -2015458 -200031 -2000102 -199777 -2034383 -200368 -2015532 -200023

923299 1133842 1131737 1253829 1130460 1262069 1055683 1264144 981298 1202904 939482 1175048

-2560121 -1558478 -2806777 -1643804 -2655931 -1582071 -2612499 -1567021 -2681187 -1516684 -2052725 -1439260

6130872 158231 6267034 159706 6064243 156274 5999980 152569 6174858 154142 6597173 1517093479249 81421 3516545 82670 3404979 82637 3434597 82678 3525415 82671 4013047 812332651623 76810 2750489 77036 2659264 73637 2565383 69891 2649443 71471 2584126 70476

2305328 70630 2358929 70578 2279116 70563 2291438 70592 2399354 70575 2826129 70530

1498762 0 1531232 0 1463313 0 1440920 0 1501704 0 1742026 0806566 70630 827697 70578 815803 70563 850518 70592 897650 70575 1084103 70530349956 48311 336917 48278 322523 48240 337529 48228 360013 48228 429270 48212382810 19088 403817 19068 417227 19091 434241 19133 442586 19116 553866 19085

55770 801 57322 796 56814 796 59238 795 62120 795 68569 79518030 2430 29641 2436 19239 2436 19510 2436 32931 2436 32398 2438

5806185 151077 5947062 153106 5767638 149741 5697153 149049 5900636 150597 6328788 148198

3500857 80447 3588133 82528 3488522 79178 3405715 78457 3501282 80022 3502659 77668810632 10134 798876 10694 772425 10675 763009 10686 762185 10697 786447 10064

43980 581 43568 560 45156 538 44897 538 34155 538 41094 53241889 6270 40203 6301 40156 6297 44549 6297 44877 6298 42816 6282

696519 3127 688499 3676 666214 3682 655916 3693 654145 3702 653226 309128244 156 26606 157 20899 158 17647 158 29008 159 49311 159

261829 91 264822 826 260089 826 264317 826 269410 826 292379 86

2428396 70222 2524435 71008 2456008 67677 2378389 66945 2469687 68499 2423833 67518465976 39191 507664 39637 491721 37715 395227 37312 454973 38181 426732 37600486551 18116 510499 18239 515221 17597 533895 17448 518182 17746 492205 17603

1369674 427 1389511 489 1343841 530 1344701 525 1395412 535 1405025 474106195 12488 116761 12643 105225 11835 104566 11660 101120 12037 99871 11841

6130872 158231 6267034 159706 6064243 156274 5999980 152569 6174858 154142 6597173 1517095846 159 6625 159 6907 159 7593 159 7821 159 7687 605727 159 6495 159 6778 159 7453 159 7676 159 7639 60

119 0 130 0 129 0 140 0 145 0 48 0318841 6995 313347 6441 289698 6374 295234 3361 266401 3386 260698 3451

95733 407 87423 413 86571 414 108380 415 86790 414 100453 493223108 6588 225924 6028 203127 5960 186854 2946 179611 2972 160245 2958

CLAIMS ON NONGOVERNMENT SECTOR BGL Foreign currencies Claims on nonfinancial state-owned enterprises BGL Foreign currencies Claims on private enterprises BGL Foreign currencies Claims on the public BGL Foreign currencies Claims on nonbank financial institutions BGL Foreign currencies

OTHER ITEMS (net) BGL Foreign currencies

Own funds Capital and reserves Financial result

Other assets and liabilities (net)

BROAD MONEY Ã3 BGL Foreign currencies

MONEY M1

Money outside banks Demand deposits (in BGL) State-owned enterprises Private enterprises Public Nonbank financial institutions

MONEY Ã2 (Ã1 + quasi-money)

Quasi-money Time deposits (in BGL) State-owned enterprises Private enterprises Public Nonbank financial institutions

Savings deposits (in BGL)

Foreign currency deposits State-owned enterprises Private enterprises Public Nonbank financial institutions

MONEY Ã3 (Ã2 + Money market instruments and restricted deposits) Money market instruments BGL Foreign currencies Import and restricted deposits BGL Foreign currencies

Source: BNB.

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Sour

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BN

B.

(con

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mill

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L)

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140

ANALYTICAL REPORTING OF COMMERCIAL BANKS

(million BGL)

XIIí97 Ií98 IIí98 IIIí98 IVí98 Ví98 VIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation liquidation

(continued)

818446 16349 691982 16022 610373 16174 738462 12379 580365 11316 564240 11296 617378 13303

2848124 138884 2931656 140799 3031899 141280 2957431 140646 2955322 113800 2864315 110137 2952057 113168

2510600 119518 2535930 112946 2567226 112710 2452809 113219 2457632 111201 2461027 110265 2452018 111561

872653 9993 913681 10794 939005 9949 966229 9667 987549 9681 979337 9626 903078 9352

1637947 109525 1622249 102152 1628221 102761 1486580 103552 1470083 101520 1481690 100639 1548940 102209

11 0 12 0 25 0 29 0 15 0 16 0 16 0

11 0 12 0 25 0 29 0 15 0 16 0 16 0

3 1 4 1 3 1 4 1 3207 1 3532 1 6940 1

3 1 4 1 3 1 4 1 3207 1 3532 1 5765 1

0 0 0 0 0 0 0 0 0 0 0 0 1175 0

1253408 554420 1275729 563494 1238267 537846 1127422 475457 1106528 454502 1095362 447684 973711 421425

335561 28566 336223 28368 325751 27358 305625 26681 314307 24530 308738 24391 248204 23516

917847 525854 939506 535126 912516 510488 821797 448776 792221 429972 786624 423293 725507 397909

1982195 1180998 2036633 1202503 2066689 1186767 2056713 1156972 1947343 1042928 1986605 1030350 2000210 994688

419962 78132 436493 77917 463787 76835 488051 75768 504062 63557 520164 62972 537066 62355

1562233 1102866 1600140 1124586 1602902 1109932 1568662 1081204 1443281 979371 1466441 967378 1463144 932333

169620 2184 186998 2202 215118 2172 247630 2229 292129 2167 328475 2024 364951 967

163405 221 180812 221 208854 218 241302 160 285725 140 322221 122 359333 119

6215 1963 6186 1981 6264 1954 6328 2069 6404 2027 6254 1902 5618 848

89026 80862 90294 82050 87655 79137 74526 64167 73422 59896 72488 59063 72006 60486

11952 10629 12115 10629 12588 10629 2357 1576 2046 1429 2056 1429 3155 1429

77074 70233 78179 71421 75067 68508 72169 62591 71376 58467 70432 57634 68851 59057

-2710556 -1492998 -2715349 -1530495 -2678593 -1495017 -2477897 -1427876 -2196783 -1281021 -2216088 -1243731 -2544645 -1582095

-2466234 -1465732 -2630187 -1576859 -2600177 -1556205 -2402435 -1481080 -2134535 -1370715 -2123615 -1339023 -2440916 -1680418

-244322 -27266 -85162 46364 -78416 61188 -75462 53204 -62248 89694 -92473 95292 -103729 98323

968170 23429 770253 44277 741307 44273 811182 43484 814131 63252 758492 67251 810506 70120

451456 8015 340573 25963 346683 25966 376951 25342 391890 42994 359477 44943 359605 47958

440604 15006 359133 17101 331082 17094 363346 17022 351470 19128 330339 19038 380823 18926

44089 120 42245 899 43893 899 44718 797 44710 794 47677 840 50689 806

32021 288 28302 314 19649 314 26167 323 26061 336 20999 2430 19389 2430

3459697 188525 3644248 151035 3640779 147076 3507766 120921 3515609 91332 3471709 86872 3458563 86973

804565 8776 817669 10788 832207 10787 829887 10224 831950 12951 792605 10004 788770 9473

43600 892 35407 894 40213 917 45071 783 61277 614 35995 595 32177 575

37622 3206 41553 5202 40846 5178 44883 5042 43364 7177 40492 6325 35118 6328

691386 4519 703869 4533 709133 4533 712412 4239 701316 2911 692078 2929 693614 2414

31957 159 36840 159 42015 159 27521 160 25993 2249 24040 155 27861 156

226923 2090 228600 2253 234333 2253 238431 576 241087 202 243673 202 253545 92

2428209 177659 2597979 137994 2574239 134036 2439448 110121 2442572 78179 2435431 76666 2416248 77408

602850 99625 646719 82913 608238 83561 495755 68334 500009 40244 480812 39019 466284 40575

469270 28780 519844 24855 482407 21722 462519 19411 478018 18277 511256 18122 482303 18684

1267165 34128 1323657 15107 1337532 13545 1349102 7054 1336685 6970 1331341 6948 1358961 5377

88924 15126 107759 15119 146062 15208 132072 15322 127860 12688 112022 12577 108700 12772

RESERVES

FOREIGN ASSETS

CLAIMS ON GOVERNMENT

BGL

Foreign currencies

CLAIMS ON STATE FUNDS AND

EXTRABUDGETARY ACCOUNTS

BGL

CLAIMS ON LOCAL BUDGETS

BGL

Foreign currencies

CLAIMS ON NONFINANCIAL

STATE-OWNED ENTERPRISES

BGL

Foreign currencies

CLAIMS ON PRIVATE

ENTERPRISES

BGL

Foreign currencies

CLAIMS ON THE PUBLIC

BGL

Foreign currencies

CLAIMS ON NONBANK

FINANCIAL INSTITUTIONS

BGL

Foreign currencies

OTHER ITEMS (net)

BGL

Foreign currencies

DEMAND DEPOSITS (in BGL)

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

TIME, SAVINGS AND FOREIGN

CURRENCY DEPOSITS

TIME DEPOSITS (in BGL)

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

SAVINGS DEPOSITS (in BGL)

FOREIGN CURRENCY

DEPOSITS

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

141

(continued)

(continued) (million BGL)

XIIí97 Ií98 IIí98 IIIí98 IVí98 Ví98 VIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation liquidation

251685 8107 244295 8149 256578 8173 335725 7644 306711 7481 313235 7415 339039 7361

4476 149 4537 149 4702 149 4661 149 4723 159 4646 159 4527 159

4446 149 4509 149 4677 149 4638 149 4682 159 4589 159 4421 159

4297 0 4360 0 4479 0 4440 0 4476 0 4385 0 4211 0

99 99 99 99 148 99 148 99 146 99 144 99 150 99

0 0 0 0 0 0 0 0 10 10 10 10 10 10

50 50 50 50 50 50 50 50 50 50 50 50 50 50

30 0 28 0 25 0 23 0 41 0 57 0 106 0

30 0 28 0 25 0 23 0 20 0 18 0 52 0

0 0 0 0 0 0 0 0 21 0 39 0 54 0

247209 7958 239758 8000 251876 8024 331064 7495 301988 7322 308589 7256 334512 7202

51718 224 51572 490 52342 490 84640 520 71707 476 77439 452 91782 435

14710 71 15241 71 14530 71 23539 110 17228 103 18411 79 19002 92

22201 62 17644 239 17251 239 19295 231 20684 217 25233 217 32392 218

4170 76 7628 165 9059 165 11777 164 7528 152 8218 152 13561 121

10637 15 11059 15 11502 15 30029 15 26267 4 25577 4 26827 4

195491 7734 188186 7510 199534 7534 246424 6975 230281 6846 231150 6804 242730 6767

147022 5275 132790 5306 133435 5368 152675 5194 148810 5180 139384 5170 138458 5184

40150 2055 46387 1894 57101 1853 79092 1606 70612 1493 77405 1462 89795 1580

6034 255 5865 158 5426 160 5333 20 5371 21 5467 21 5627 2

2285 149 3144 152 3572 153 9324 155 5488 152 8894 151 8850 1

1176979 493595 1131166 499871 1184717 501175 1068764 485267 1075458 483429 1082747 481557 1064190 479954

21988 273 6201 360 6334 360 6589 309 7330 527 7858 677 12941 680

1154991 493322 1124965 499511 1178383 500815 1062175 484958 1068128 482902 1074889 480880 1051249 479274

600736 369020 657581 383386 669834 384343 689211 392413 749190 392249 752225 391124 750365 397462

146577 102631 266089 191915 278894 198788 333178 230202 395661 233114 396509 233400 385391 236553

454159 266389 391492 191471 390940 185555 356033 162211 353529 159135 355716 157724 364974 160909

129337 5341 129178 5399 122809 5417 112208 5471 112898 5403 124827 5385 121159 5416

46879 2208 47528 2208 48189 2208 43764 2213 48138 2213 55936 2213 59449 2213

82458 3133 81650 3191 74620 3209 68444 3258 64760 3190 68891 3172 61710 3203

67393 774 75033 779 68594 781 96293 808 103289 801 111183 798 116607 803

64661 450 71932 450 65775 450 93093 471 99990 471 108044 471 113387 471

2732 324 3101 329 2819 331 3200 337 3299 330 3139 327 3220 332

306876 -488580 382163 -503379 454026 -510173 555956 -518808 541870 -529161 545520 -513314 234175 -914600

600875 127680 657931 154472 703133 154600 766995 192911 836385 203763 999423 203583 1181529 203516

-293999 -616260 -275768 -657851 -249107 -664773 -211039 -711719 -294515 -732924 -453903 -716897 -947354 -1118116

MONEY MARKET INSTRUMENTS

AND RESTRICTED DEPOSITS

RECEIVED LOANS AND

PARTICIPATIONS

BGL

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

Foreign currencies

Private enterprises

Nonbank financial institutions

IMPORT AND RESTRICTED

DEPOSITS

BGL

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

Foreign currencies

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

FOREIGN LIABILITIES

BGL

Foreign currencies

GOVERNMENT DEPOSITS

BGL

Foreign currencies

DEPOSITS OF STATE FUNDS AND

EXTRABUDGETARY ACCOUNTS

BGL

Foreign currencies

DEPOSITS OF LOCAL BUDGETS

BGL

Foreign currencies

OWN FUNDS

Capital and reserves

Financial result

142

(continued) (million BGL)

VIIí98 VIIIí98 IXí98 Xí98 XIí98 XIIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation

(continued)

624453 13116 604178 12939 554946 12517 617010 8044 680191 6185 651188 5336

2930225 111035 3228768 115628 2854136 110369 2895687 104486 3010543 103923 2828235 102188

2407609 109172 2505483 112098 2457381 105289 2201306 103725 2202932 106625 1656780 67564

883741 9290 893841 10928 909324 10816 886729 10703 880602 10492 838064 10287

1523868 99882 1611642 101170 1548057 94473 1314577 93022 1322330 96133 818716 57277

17 0 18 0 15 0 23 0 29 0 81 0

17 0 18 0 15 0 23 0 29 0 81 0

9125 1 10805 1 13049 1 13613 1 17211 1 17052 1

9125 1 10805 1 13049 1 13613 1 17211 1 17052 1

0 0 0 0 0 0 0 0 0 0 0 0

951295 413466 967532 431847 928982 389984 921031 378408 939555 385355 944246 380160

236689 28894 252453 34001 275925 34169 304835 34114 285641 34052 298585 34042

714606 384572 715079 397846 653057 355815 616196 344294 653914 351303 645661 346118

2006125 974833 2058406 965375 2098601 930705 2143470 931891 2224783 941458 2253167 932790

580516 63575 597631 62020 675319 83003 722893 90290 793560 136757 801681 93613

1425609 911258 1460775 903355 1423282 847702 1420577 841601 1431223 804701 1451486 839177

406819 910 436835 771 473524 736 478474 713 480659 710 480491 600

398306 111 431910 117 466849 116 472757 115 474879 112 476006 109

8513 799 4925 654 6675 620 5717 598 5780 598 4485 491

71175 59143 42989 29338 38939 27487 36787 25496 39303 26304 37971 26042

3947 1429 4386 1377 2960 1377 2998 1377 4319 1377 3565 1518

67228 57714 38603 27961 35979 26110 33789 24119 34984 24927 34406 24524

-2490789 -1571594 -2713251 -1656743 -2595416 -1594588 -2548885 -1575065 -2585487 -1522869 -2025978 -1444596

-2373681 -1627126 -2587683 -1724255 -2507013 -1657518 -2457319 -1639546 -2509677 -1588759 -1947256 -1510791

-117108 55532 -125568 67512 -88403 62930 -91566 64481 -75810 65890 -78722 66195

805888 70630 827643 70578 815790 70563 850509 70592 897640 70575 1084097 70530

349956 48311 336917 48278 322523 48240 337529 48228 360013 48228 429270 48212

382810 19088 403817 19068 417227 19091 434241 19133 442586 19116 553866 19085

55770 801 57322 796 56814 796 59238 795 62120 795 68569 795

17352 2430 29587 2436 19226 2436 19501 2436 32921 2436 32392 2438

3500524 80447 3587799 82528 3488193 79178 3405404 78457 3500968 80022 3492345 77668

810632 10134 798876 10694 772425 10675 763009 10686 762185 10697 776446 10064

43980 581 43568 560 45156 538 44897 538 34155 538 41094 532

41889 6270 40203 6301 40156 6297 44549 6297 44877 6298 42816 6282

696519 3127 688499 3676 666214 3682 655916 3693 654145 3702 653226 3091

28244 156 26606 157 20899 158 17647 158 29008 159 39310 159

261829 91 264822 826 260089 826 264317 826 269410 826 292379 86

2428063 70222 2524101 71008 2455679 67677 2378078 66945 2469373 68499 2423520 67518

465643 39191 507330 39637 491392 37715 394916 37312 454659 38181 426419 37600

486551 18116 510499 18239 515221 17597 533895 17448 518182 17746 492205 17603

1369674 427 1389511 489 1343841 530 1344701 525 1395412 535 1405025 474

106195 12488 116761 12643 105225 11835 104566 11660 101120 12037 99871 11841

RESERVES

FOREIGN ASSETS

CLAIMS ON GOVERNMENT

BGL

Foreign currencies

CLAIMS ON STATE FUNDS AND

EXTRABUDGETARY ACCOUNTS

BGL

CLAIMS ON LOCAL BUDGETS

BGL

Foreign currencies

CLAIMS ON NONFINANCIAL

STATE-OWNED ENTERPRISES

BGL

Foreign currencies

CLAIMS ON PRIVATE

ENTERPRISES

BGL

Foreign currencies

CLAIMS ON THE PUBLIC

BGL

Foreign currencies

CLAIMS ON NONBANK

FINANCIAL INSTITUTIONS

BGL

Foreign currencies

OTHER ITEMS (net)

BGL

Foreign currencies

DEMAND DEPOSITS (in BGL)

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

TIME, SAVINGS AND FOREIGN

CURRENCY DEPOSITS

TIME DEPOSITS (in BGL)

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

SAVINGS DEPOSITS (in BGL)

FOREIGN CURRENCY

DEPOSITS

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

143

(continued) (million BGL)

VIIí98 VIIIí98 IXí98 Xí98 XIí98 XIIí98all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in all banks incl. in

liquidation liquidation liquidation liquidation liquidation liquidation

307035 7154 302220 6600 278853 6533 285075 3520 256470 3545 250593 3511

5846 159 6625 159 6907 159 7593 159 7821 159 7687 60

5727 159 6495 159 6778 159 7453 159 7676 159 7639 60

5520 0 6292 0 6577 0 7254 0 7481 0 7470 0

147 99 143 99 141 99 139 99 135 99 33 0

10 10 10 10 10 10 10 10 10 10 10 10

50 50 50 50 50 50 50 50 50 50 126 50

119 0 130 0 129 0 140 0 145 0 48 0

48 0 44 0 39 0 35 0 31 0 27 0

71 0 86 0 90 0 105 0 114 0 21 0

301189 6995 295595 6441 271946 6374 277482 3361 248649 3386 242906 3451

78081 407 69671 413 68819 414 90628 415 69038 414 82661 493

15355 65 14051 67 14727 55 15607 57 14946 55 34729 51

27512 218 29698 218 33187 232 53795 247 44068 248 38497 240

9105 121 8540 125 8379 124 8538 108 7388 108 6360 108

26109 3 17382 3 12526 3 12688 3 2636 3 3075 94

223108 6588 225924 6028 203127 5960 186854 2946 179611 2972 160245 2958

115400 5147 115793 4576 104123 4568 100054 1564 96757 1568 94471 1565

93431 1437 93939 1448 82962 1389 72550 1378 68029 1400 52428 1389

5383 3 5901 3 5670 2 6223 3 6814 3 5487 3

8894 1 10291 1 10372 1 8027 1 8011 1 7859 1

1065131 479199 1136642 479851 1139939 477135 979694 481142 1003841 481734 974123 483419

13294 694 12350 686 13305 686 21962 673 18302 673 13611 674

1051837 478505 1124292 479165 1126634 476449 957732 480469 985539 481061 960512 482745

765775 397404 1027113 418198 854810 405143 867165 402397 889757 408306 644633 405357

378414 216202 401459 224680 404411 223123 438231 222854 451204 223451 306804 223153

387361 181202 625654 193518 450399 182020 428934 179543 438553 184855 337829 182204

138379 5370 140283 5405 148407 5217 176317 5177 184022 5267 163090 3835

67184 2213 73962 2214 74037 2214 73591 2214 86566 2214 91499 816

71195 3157 66321 3191 74370 3003 102726 2963 97456 3053 71591 3019

130362 796 138049 796 136679 775 160154 772 164099 781 74515 777

125460 471 133252 462 132168 462 155399 462 161328 462 73107 462

4902 325 4797 334 4511 313 4755 310 2771 319 1408 315

202961 -930901 -17967 -1052698 -38526 -1062038 34166 -1064367 112897 -1002536 159795 -975025

1191305 202941 1189489 201131 1189521 200031 1195463 199777 1196038 200368 1213691 200023

-988344 -1133842 -1207456 -1253829 -1228047 -1262069 -1161297 -1264144 -1083141 -1202904 -1053896 -1175048

MONEY MARKET INSTRUMENTS

AND RESTRICTED DEPOSITS

RECEIVED LOANS AND

PARTICIPATIONS

BGL

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

Foreign currencies

Private enterprises

Nonbank financial institutions

IMPORT AND RESTRICTED

DEPOSITS

BGL

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

Foreign currencies

State-owned enterprises

Private enterprises

Public

Nonbank financial institutions

FOREIGN LIABILITIES

BGL

Foreign currencies

GOVERNMENT DEPOSITS

BGL

Foreign currencies

DEPOSITS OF STATE FUNDS AND

EXTRABUDGETARY ACCOUNTS

BGL

Foreign currencies

DEPOSITS OF LOCAL BUDGETS

BGL

Foreign currencies

OWN FUNDS

Capital and reserves

Financial result

Source: BNB.

144

NO

MIN

AL

IN

TE

RE

ST

RA

TE

S O

N S

HO

RT

-TE

RM

CR

ED

ITS

IN

1998

Mon

ths

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ruar

yM

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ilM

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Oct

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Nov

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rD

ecem

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Janu

ary

1.17

Feb

ruar

y2.

311.

13M

arch

3.41

2.22

1.08

Apr

il4.

593.

392.

241.

14M

ay5.

854.

633.

462.

361.

20Ju

ne7.

045.

804.

623.

502.

331.

12Ju

ly8.

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965.

764.

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221.

09A

ugus

t9.

338.

076.

865.

724.

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292.

141.

04Se

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10.4

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845.

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111.

06O

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198.

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805.

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12.9

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986.

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312.

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14.1

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11.5

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7.84

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Sour

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BN

B.

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1998*

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Oct

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Janu

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-0.8

0F

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0-0

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Mar

ch-0

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0.52

1.13

Apr

il0.

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171.

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ay1.

492.

312.

931.

780.

74Ju

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585.

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074.

883.

813.

05Ju

ly7.

308.

178.

827.

606.

515.

722.

60A

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t9.

4110

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10.9

69.

728.

607.

804.

621.

97Se

ptem

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7.33

8.19

8.85

7.63

6.53

5.75

2.62

0.02

-1.9

1O

ctob

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9.15

8.03

7.24

4.07

1.44

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21.

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11.0

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12.6

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10.2

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531.

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13.0

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14.6

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5.37

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1.77

* In

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are

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BN

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145

NO

MIN

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IN

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S O

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NE

-MO

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EP

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1998

Mon

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ary

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yM

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Apr

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neJu

lyA

ugus

tSe

ptem

ber

Oct

ober

Nov

embe

rD

ecem

ber

Janu

ary

0.25

Feb

ruar

y0.

490.

24M

arch

0.72

0.47

0.23

Apr

il0.

950.

700.

460.

23M

ay1.

180.

920.

680.

450.

23Ju

ne1.

401.

150.

910.

680.

450.

23Ju

ly1.

651.

401.

160.

930.

700.

470.

24A

ugus

t1.

931.

681.

431.

200.

970.

740.

520.

27Se

ptem

ber

2.21

1.95

1.71

1.48

1.25

1.02

0.79

0.54

0.27

Oct

ober

2.48

2.23

1.98

1.75

1.52

1.29

1.06

0.82

0.54

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r2.

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502.

262.

031.

801.

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090.

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27D

ecem

ber

3.04

2.78

2.54

2.30

2.07

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1.61

1.36

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0.81

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Sour

ce:

BN

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1998*

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0F

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5-1

.48

Mar

ch-2

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-1.2

00.

28A

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6-1

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0.12

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-2.9

9-1

.32

0.16

-0.1

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June

-0.9

20.

792.

302.

021.

902.

14Ju

ly0.

812.

554.

083.

793.

673.

911.

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ugus

t2.

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775.

325.

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98

* In

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146

CO

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1998

XII

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III

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VI

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II

annu

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ffec

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7.01

6.58

5.94

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5.38

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5.33

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5.21

5.26

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5.15

Bas

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796.

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440.

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430.

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420.

430.

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Ave

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spr

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the

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ean

nual

eff

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858.

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279.

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9.03

8.57

7.94

8.22

8.87

8.79

8.37

on s

hort

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redi

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nual

6.25

7.61

7.74

7.61

8.30

9.17

8.29

7.89

7.32

7.58

8.15

8.08

7.72

mon

thly

0.52

0.63

0.64

0.63

0.69

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13.8

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Ave

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147

DENOMINATION COMPOSITION IN NOTES AND COINS

(million BGL)

31 December 1997 30 June 1998 31 December 1998

Notes, total 1 875 722 358 472 1 875 527 815 417 2 515 404 878 102

50 000 levs 951 500 000 000 952 435 000 000 1 499 734 900 00010 000 levs 399 999 980 000 400 034 985 000 498 584 545 0005 000 levs 204 994 925 000 204 828 925 000 203 878 757 5002 000 levs 110 503 471 000 110 059 047 000 109 141 918 0001 000 levs 78 282 550 500 85 395 780 000 102 795 445 000

500 levs 73 762 730 750 73 041 565 250 63 703 033 500200 levs 38 083 224 900 33 856 039 900 26 952 849 800100 levs 12 320 315 250 10 248 469 600 7 335 141 55050 levs 3 880 878 525 3 385 900 900 2 045 605 22520 levs 1 852 931 187 1 731 942 407 1 232 682 52710 levs 240 541 172 223 461 172 -5 levs 162 200 276 151 250 276 -2 levs 66 399 089 64 903 089 -1 lev 72 210 823 70 545 823 -

Coins, total 5 147 623 049 6 818 657 649 8 084 399 417

50 levs 2 540 087 500 3 114 387 500 3 114 387 50020 levs 491 869 980 1 059 507 780 1 464 167 78010 levs 750 630 000 1 084 480 000 1 254 789 0005 levs 332 646 450 332 646 450 332 646 4502 levs 160 180 000 159 148 000 158 968 0001 lev 136 608 651 136 273 051 136 273 051

50 stotinkas 42 074 358 41 133 358 41 132 68220 stotinkas 46 755 061 44 289 861 39 957 60810 stotinkas 32 955 993 31 692 993 31 492 690

Commemorative 613 815 056 815 098 656 1 510 584 656

Notes and coins, total 1 880 869 981 521 1 882 346 473 066 2 523 489 277 519

Source: BNB.

148

CONSOLIDATED BALANCE SHEET OF COMMERCIAL BANKS

(annual closing of accounts)(thousand BGL)

Current year Previous year

ASSETS

Vault cash and current accounts with the BNB 786 674 579 944 272 812Claims on banks and other financial institutions 2 498 036 671 2 316 019 454Securities in trading portfolio 1 270 147 500 1 519 622 721Credits to nonfinancial institutions and other clients 1 844 459 984 1 120 453 728Assets from resale 21 843 703 17 993 951Claims on interest and other assets 355 709 633 889 997 578Securities in investment portfolio 473 701 418 288 557 630Fixed assets 344 375 979 264 568 681

ASSETS, TOTAL 7 594 949 469 7 361 486 557

LIABILITIES

Deposits of banks and other financial institutions 590 259 215 701 697 449Deposits of nonfinancial institutions and other clients 4 933 933 909 4 600 451 486Other attracted resources 255 766 855 377 396 584Interest payments and other liabilities 689 064 548 795 497 135Subordinated debt 0 0

LIABILITIES, TOTAL 6 469 024 527 6 475 042 655

Minority participation 0 0

OWN FUNDS

Authorized capital 599 843 980 316 971 201Premium related to own funds 535 424 535 424Reserves 304 305 965 205 220 123Historic results 92 179 939 -4 923 029Current result 129 059 634 368 640 184

OWN FUNDS, TOTAL 1 125 924 942 886 443 903

LIABILITIES AND OWN FUNDS, TOTAL 7 594 949 469 7 361 486 557

OFF-BALANCE-SHEET LIABILITIES 734 696 229 706 552 238

Source: BNB.

149

CONSOLIDATED BALANCE SHEET OF COMMERCIAL BANKS

(annual closing of accounts of Group I banks)(thousand BGL)

Current year Previous year

ASSETS

Vault cash and current accounts with the BNB 551 679 075 650 125 179Claims on banks and other financial institutions 1 761 372 386 1 753 116 840Securities in trading portfolio 929 529 967 1 247 105 678Credits to nonfinancial institutions and other clients 1 142 514 308 691 902 606Assets from resale 2 247 540 1 196 549Claims on interest and other assets 260 886 631 762 179 900Securities in investment portfolio 455 695 886 275 768 096Fixed assets 238 263 492 191 293 202

ASSETS, TOTAL 5 342 189 287 5 572 688 052

LIABILITIES

Deposits of banks and other financial institutions 226 409 028 414 339 332Deposits of nonfinancial institutions and other clients 3 733 918 803 3 555 825 169Other attracted resources 155 139 422 301 300 819Interest payments and other liabilities 451 727 527 647 921 100Subordinated debt 0 0

LIABILITIES, TOTAL 4 567 194 780 4 919 386 421

Minority participation 0 0

OWN FUNDS

Authorized capital 296 086 476 124 562 760Premium related to own funds 0 0Reserves 250 825 640 153 927 033Historic results 120 132 922 -2 715 549Current result 107 949 469 377 527 388

OWN FUNDS, TOTAL 774 994 507 653 301 632

LIABILITIES AND OWN FUNDS, TOTAL 5 342 189 287 5 572 688 052

OFF-BALANCE-SHEET LIABILITIES 320 845 302 237 374 822

Source: BNB.

150

CONSOLIDATED BALANCE SHEET OF COMMERCIAL BANKS

(annual closing of accounts of Group II banks)(thousand BGL)

Current year Previous year

ASSETS

Vault cash and current accounts with the BNB 156 009 591 207 967 373Claims on banks and other financial institutions 385 482 407 303 219 807Securities in trading portfolio 309 511 431 233 738 406Credits to nonfinancial institutions and other clients 388 808 719 248 766 487Assets from resale 19 596 163 16 797 402Claims on interest and other assets 85 397 562 121 246 522Securities in investment portfolio 17 946 005 12 760 420Fixed assets 83 065 706 62 872 679

ASSETS, TOTAL 1 445 817 584 1 207 369 096

LIABILITIES

Deposits of banks and other financial institutions 209 438 671 113 071 311Deposits of nonfinancial institutions and other clients 736 293 269 718 740 985Other attracted resources 67 252 748 66 818 650Interest payments and other liabilitiesSubordinated debt 0 0

LIABILITIES, TOTAL 1 146 349 114 991 971 690

Minority participation 0 0

OWN FUNDS

Authorized capital 248 557 504 178 008 441Premium related to own funds 0 0Reserves 47 634 741 48 748 862Historic results -9 278 378 -2 098 181Current result 12 554 603 -9 261 716

OWN FUNDS, TOTAL 299 468 470 215 397 406

LIABILITIES AND OWN FUNDS, TOTAL 1 445 817 584 1 207 369 096

OFF-BALANCE-SHEET LIABILITIES 213 505 190 327 726 777

Source: BNB.

151

CONSOLIDATED BALANCE SHEET OF COMMERCIAL BANKS

(annual closing of accounts of Group III banks)(thousand BGL)

Current year Previous year

ASSETS

Vault cash and current accounts with the BNB 78 985 913 86 180 260Claims on banks and other financial institutions 351 181 878 259 682 807Securities in trading portfolio 31 106 102 38 778 637Credits to nonfinancial institutions and other clients 313 136 957 179 784 635Assets from resale 0 0Claims on interest and other assets 9 425 440 6 571 156Securities in investment portfolio 59 527 29 114Fixed assets 23 046 781 10 402 800

ASSETS, TOTAL 806 942 598 581 429 409

LIABILITIES

Deposits of banks and other financial institutions 154 411 516 174 286 806Deposits of nonfinancial institutions and other clients 463 721 837 325 885 332Other attracted resources 33 374 685 9 277 115Interest payments and other liabilities 103 972 595 54 235 291Subordinated debt 0 0

LIABILITIES, TOTAL 755 480 633 563 684 544

Minority participation 0 0

OWN FUNDS

Authorized capital 55 200 000 14 400 000Premium related to own funds 535 424 535 424Reserves 5 845 584 2 544 228Historic results -18 674 605 -109 299Current result 8 555 562 374 512

OWN FUNDS, TOTAL 51 461 965 17 744 865

LIABILITIES AND OWN FUNDS, TOTAL 806 942 598 581 429 409

OFF-BALANCE-SHEET LIABILITIES 200 345 737 141 450 639

Source: BNB.

152

CONSOLIDATED INCOME STATEMENT OF COMMERCIAL BANKS

(annual closing of accounts)(thousand BGL)

Current year Previous year

Revenue from interest and other related revenue 469 178 675 776 593 151Expenditure on interest and other related expenditure 143 722 345 547 143 074

REVENUE FROM INTEREST, NET 325 456 330 229 450 077

Net income/loss from fees and commissions 98 969 521 62 791 682Net income/loss from operations in securities in trading portfolio -157 021 577 3 710 842Net income/loss from valuation adjustments of forex operations -18 539 198 1 388 401 235Other income 51 540 830 247 435 947

NET REVENUE FROM OTHER BANKING OPERATIONS, TOTAL -25 050 424 1 702 339 706

Operating expenditure -374 606 135 -266 599 832Decrease/(increase) of provisions 335 741 532 -1 106 900 878Expenditure on revaluation of long-term assets and investment -72 827 483 -124 937

OPERATING EXPENSES, TOTAL -111 692 088 -1 373 625 647

PRE-TAX PROFIT/(LOSS) AND

EXTRAORDINARY INCOME/(EXPENDITURE) 188 713 818 558 164 132

Extraordinary income/(expenditure) 17 731 302 6 769 864

PRE-TAX PROFIT/(LOSS) AND

AFTER EXTRAORDINARY REVENUE/(EXPENDITURE) 206 445 120 564 933 996

Taxation 77 385 486 198 939 961

POST-TAX PROFIT/(LOSS) 129 059 634 368 640 184

Minority participation 0 0

DISTRIBUTABLE PROFIT/(LOSS) 129 059 634 368 640 184

Dividends 875 698 0

RETAINED EARNINGS FOR THE YEAR 128 183 936 368 640 184

Source: BNB.

153

CONSOLIDATED INCOME STATEMENT OF COMMERCIAL BANKS

(annual closing of accounts of Group I banks)(thousand BGL)

Current year Previous year

Revenue from interest and other related revenue 335 758 088 631 377 972Expenditure on interest and other related expenditure 92 019 404 445 728 078

REVENUE FROM INTEREST, NET 243 738 684 185 649 894

Net income/loss from fees and commissions 63 903 981 36 091 520Net income/loss from operations in securities in trading portfolio -180 541 103 -27 817 638Net income/loss from valuation adjustments of forex operations -23 955 481 1 249 397 905Other income 33 231 871 242 726 820

NET REVENUE FROM OTHER BANKING OPERATIONS, TOTAL -107 360 732 1 500 398 607

Operating expenditure -241 955 764 -185 103 231Decrease/(increase) of provisions 329 605 026 -944 434 196Expenditure on revaluation of long-term assets and investment -63 831 740 0

OPERATING EXPENSES, TOTAL 23 817 520 -1 129 537 427

PRE-TAX PROFIT/(LOSS) AND

EXTRAORDINARY INCOME/(EXPENDITURE) 160 195 472 556 511 074

Extraordinary income/(expenditure) 12 715 734 3 275 421

PRE-TAX PROFIT/(LOSS) AND

AFTER EXTRAORDINARY REVENUE/(EXPENDITURE) 172 911 206 559 786 495

Taxation 64 961 737 182 259 107

POST-TAX PROFIT/(LOSS) 107 949 469 377 527 388

Minority participation 0 0

DISTRIBUTABLE PROFIT/(LOSS) 107 949 469 377 527 388

Dividends 0 0

RETAINED EARNINGS FOR THE YEAR 107 949 469 377 527 388

Source: BNB.

154

CONSOLIDATED INCOME STATEMENT OF COMMERCIAL BANKS

(annual closing of accounts of Ggroup II banks)(thousand BGL)

Current year Previous year

Revenue from interest and other related revenue 93 407 906 110 251 408Expenditure on interest and other related expenditure 36 829 695 83 627 971

REVENUE FROM INTEREST, NET 56 578 211 26 623 437

Net income/loss from fees and commissions 24 352 151 17 446 587Net income/loss from operations in securities in trading portfolio 19 970 682 21 846 877Net income/loss from valuation adjustments of forex operations -917 541 92 450 600Other income 15 038 613 4 419 613

NET REVENUE FROM OTHER BANKING OPERATIONS, TOTAL 58 443 905 136 163 677

Operating expenditure -90 007 708 -56 443 493Decrease/(increase) of provisions -1 375 628 -114 552 159Expenditure on revaluation of long-term assets and investment -8 796 808 -124 937

OPERATING EXPENSIS, TOTAL -100 180 144 -171 120 589

PRE-TAX PROFIT/(LOSS) AND

EXTRAORDINARY INCOME/(EXPENDITURE) 14 841 972 -8 333 475

Extraordinary income/(expenditure) 6 124 473 3 052 046

PRE-TAX PROFIT/(LOSS) AND

AFTER EXTRAORDINARY REVENUE/(EXPENDITURE) 20 966 445 -5 281 429

Taxation 8 411 842 3 980 287

POST-TAX PROFIT/(LOSS) 12 554 603 -9 261 716

Minority participation 0 0

DISTRIBUTABLE PROFIT/(LOSS) 12 554 603 -9 261 716

Dividends 875 698 0

RETAINED EARNINGS FOR THE YEAR 11 678 905 -9 261 716

Source: BNB.

155

CONSOLIDATED INCOME STATEMENT OF COMMERCIAL BANKS

(annual closing of accounts of Group III banks)(thousand BGL)

Current year Previous year

Revenue from interest and other related revenue 40 012 681 34 963 771Expenditure on interest and other related expenditure 14 873 246 17 787 025

REVENUE FROM INTEREST, NET 25 139 435 17 176 746

Net income/loss from fees and commissions 10 713 389 9 253 575Net income/loss from operations in securities in trading portfolio 3 548 844 9 681 603Net income/loss from valuation adjustments of forex operations 6 333 824 46 552 730Other income 3 270 346 289 514

NET REVENUE FROM OTHER BANKING OPERATIONS, TOTAL 23 866 403 65 777 422

Operating expenditure -42 642 663 -25 053 108Decrease/(increase) of provisions 7 512 134 -47 914 523Expenditure on revaluation of long-term assets and investment -198 935 0

OPERATING EXPENSES, TOTAL -35 329 464 -72 967 631

PRE-TAX PROFIT/(LOSS) AND

EXTRAORDINARY INCOME/(EXPENDITURE) 13 676 374 9 986 533

Extraordinary income/(expenditure) -1 108 905 442 397

PRE-TAX PROFIT/(LOSS) AND

AFTER EXTRAORDINARY REVENUE/(EXPENDITURE) 12 567 469 10 428 930

Taxation 4 011 907 12 700 567

POST-TAX PROFIT/(LOSS) 8 555 562 374 512

Minority participation 0 0

DISTRIBUTABLE PROFIT/(LOSS) 8 555 562 374 512

Dividends 0 0

RETAINED EARNINGS FOR THE YEAR 8 555 562 374 512

Source: BNB.

156

CAPITAL ADEQUACY OF COMMERCIAL BANKS AS OF 31 DECEMBER 1998

GROUP I (MAJOR BANKS)

Indicators 31 December 1998

Capital base [thousand BGL] 731 056 780Primary capital [thousand BGL] 568 300 009Assets, total [thousand BGL] 5 521 351 366Total risk component [thousand BGL] 1 791 844 791Total capital adequacy (1000/5100) [%] 41Primary capital adequacy (1100/5100) [%] 32Degree of asset risk (5100/5000) [%] 32Degree of asset coverage (1000/5000) [%] 13

GROUP II (SMALL AND MEDIUM-SIZED BANKS)

Indicators 31 December 1998

Capital base [thousand BGL] 243 861 764Primary capital [thousand BGL] 205 929 057Assets, total [thousand BGL] 1 481 158 767Total risk component [thousand BGL] 741 883 458Total capital adequacy (1000/5100) [%] 33Primary capital adequacy (1100/5100) [%] 28Degree of asset risk (5100/5000) [%] 50Degree of asset coverage (1000/5000) [%] 16

GROUP III (FOREIGN BANKS AND BRANCHES OF FOREIGN BANKS)

Indicators 31 December 1998

Capital base [thousand BGL] 68 004 935Primary capital [thousand BGL] 55 166 257Assets, total [thousand BGL] 580 414 244Total risk component [thousand BGL] 263 243 416Total capital adequacy (1000/5100) [%] 26Primary capital adequacy (1100/5100) [%] 21Degree of asset risk (5100/5000) [%] 45Degree of asset coverage (1000/5000) [%] 12

BANKING SYSTEM, TOTAL

Indicators 31 December 1998

Capital base [thousand BGL] 1 042 923 479Primary capital [thousand BGL] 829 395 323Assets, total [thousand BGL] 7 582 924 377Total risk component [thousand BGL] 2 796 971 665Total capital adequacy (1000/5100) [%] 37Primary capital adequacy (1100/5100) [%] 30Degree of asset risk (5100/5000) [%] 37Degree of asset coverage (1000/5000) [%] 14

Source: BNB.

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Major Resolutions of the Managing Board

of the BNB in 1998

29 January As of 9 February 1998 the BNB put into circulation a silver commemorative coinEURO (small) ëSt. Sofia Churchí, issue 1998.

Following a public tender KPMG was selected to audit and verify BNB financialand accounting reports in compliance with International Accounting Standards forthe 1997, 1998 and 1999 financial years.

10 February As of 13 February 1998 the BNB put into circulation a Cuprum-Nickel commemora-tive coin ë100 Years Bulgarian Telegraph Agencyí, issue 1998.

19 February As of 27 February 1998 the BNB put into circulation a silver coin commemoratingthe 120th anniversary of Bulgariaís Liberation from the Ottoman Rule with a nomi-nal value BGL 10,000, issue 1998.

Regulation No. 21 on the minimum required reserves maintained with the BulgarianNational Bank by banks was adopted.

Regulation No. 6 on extending collateralized lev loans to banks was adopted.

19 March As of 30 March 1998 the BNB put into circulation a banknote of BGL 1,000 nomi-nal value, issue 1997, to be used as legal tender. The banknote is printed in BNBPrinting Works.

31 March Pursuant to Article 4, para. 2 of Regulation No. 5 of 1996 and letter No. 17-00-0362of 27 March 1998 of the Minister of Finance, government securities primary dealersfor the period 1 April ≠ 31 December 1998 were approved as follows:

I. For the period 1 April ≠ 30 June 1998

State Insurance InstituteEurobankRaiffeisenbankSociete Generale

II. For the period 1 April ≠ 31 December 1998

BiochimBulbankBulgaria-InvestBulgarian-Russian Investment BankBulgarian Post BankExpressbankFirst Investment BankHebrosING BankInternational Bank for Trade and DevelopmentMetropolitan Municipal BankState Savings BankUnited Bulgarian BankFinancial House ëEurofinanceíFinancial House ëElanaí

30 April The following commercial banks were selected, subject to approval by the Ministryof Finance, as correspondents on the cash basis reporting of the government budgetuntil the end of 1998: Biochim, Bulgarian Post Bank, Bulgarian-Russian InvestmentBank, Bulgaria-Invest, Bulbank, State Savings Bank, Expressbank, United Bulgarian

161

Bank, Municipal Bank, First Investment Bank, Hebros Bank. Pursuant to para. 2 ofthe Transitional and Final Provisions of the State Budget Law for 1998, they meetthe adopted system of Criteria on Selection of Banks.

2 July Regulation No. 5 of 1998 on the terms and procedure for issuance, acquisition andredemption of book-entry government securities was adopted.

16 July Regulation No. 22 on the Central Credit Register of banks was adopted.

24 September Amendments to Regulation No. 6 on extending collateralized lev loans to bankswere adopted.

Amendments to Regulation No. 21 on the minimum required reserves maintainedwith the Bulgarian National Bank by banks were adopted.

1 October On 15 October 1998 the Bulgarian National Bank put into circulation a silver com-memorative coin EURO ëRhytoní, issue 1998, and a gold commemorative coin ëTheTetraevangelia of Ivan Alexanderí, issue 1998.

As of 1 November 1998, the following commercial banks were excluded fromBISERA: Businessbank AD ≠ insolvent; Bobovdol Commercial Bank ≠ in liquida-tion; Kristalbank AD ≠ insolvent; Dobrudzha Commercial Bank ≠ insolvent; Bankfor Agricultural Credit ≠ insolvent; International Bank for Investments and Devel-opment ≠ insolvent; Balkanbank ≠ insolvent; Trade and Savings Bank ≠ insolvent;Mineralbank ≠ insolvent; Bulgarian Agricultural and Industrial Bank ≠ in liquida-tion; Agrobusinessbank ≠ insolvent; Private Agricultural and Investment Bank ≠insolvent; Economic Bank ≠ insolvent; First Private Bank ≠ insolvent.

3 December A new BNB branch was opened in Vratza.

1. The exchange rate of the Euro to the Bulgarian lev was to be announced on 31December 1998 according to Article 29, para. 2 of the Law on the BNB. The ex-change rate of the Euro to the Bulgarian lev was to be determined by multiplyingthe exchange rate of the Deutschemark to the lev (BGL 1,000 per DEM 1) by theofficial exchange rate at which the Deutschemark had been converted to the Euroaccording to the following formula:

1 EUR = X.XXXXX DEM . 1,000 = XXXX.XX BGL.

The exchange rate determined according to this formula was to be approved by aresolution of the Managing Board of the BNB to be published in the first 1999 issueof the State Gazette. The exchange rate of the Deutschemark to the Euro an-nounced by the European Central Bank (ECB) was to be used.

2.1. The BNB determined convertible to the lev:

≠ the Euro and all currencies included in the Euro: Austrian schilling, Belgiumfranc, Deutschemark, Irish punt, Spanish peseta, Italian lira, Portuguese escudo,French franc, Finnish mark, Dutch guilder;

≠ the currencies for which the European Central Bank sets reference rates: US dol-lar, Japanese yen, Greek drachma, Danish kroner, Swedish kronor, British pound,Norwegian kroner, Czech koruna, Cyprus lira, Estonian kroon, Hungarian forint,Polish zloty, Slovenian tolar, Swiss franc, Canadian dollar, Australian dollar, NewZealand dollar;

≠ Turkish lira.

2.2. The lev exchange rates to ECB reference currencies were to be computed onthe basis of ECB quotations announced at 14.15 central European time in theECBO5 Reuters page. The official rates of these currencies to the lev were to be setby dividing the lev equivalent to the Euro by the equivalents of these currencies tothe Euro according to the formula:

the rate of the convertible currency to the lev = the exchange rate of the Euro to

the lev/the rate of the convertible currency to the Euro. The fixed rates of the

3 and

29 December

162

currencies included in the European Monetary Union (EMU) adopt ECB stand-

ards and are expressed in six digits. Exchange rates of currencies not included in

the EMU will be rounded to the fourth digit after the decimal point.

2.3. The BNB was to use direct quotation in setting the GBP exchange rate, i.e. theEuro was the base currency and the equivalent of British pounds per one Euro wasto be computed.

2.4. The BNB was to use the Reuters CBTA page (quotations are announced at15.00 local time every day) to compute the exchange rate of the Turkish lira.

3. In addition to exchange rates of convertible currencies under item 2 of this Reso-lution, the BNB was to daily set and publish the exchange rate of monetary gold ac-cording to the following formula:

(the exchange rate of monetary gold in Euro) x (the exchange rate of the Euro to

the Bulgarian lev).

To compute the exchange rate of gold, the BNB was to use Rothschilds NMRBpage in Reuters which is published at 13.00 local time.

4. Exchange rates of the currencies under item 2 and monetary gold under item 3 ofthis Resolution were to be published in Reuters and BNB Internet pages by 16.00(local time) on each business day, as well as in mass media. The exchange rateswere to be valid for the current business day. If no new exchange rate was an-nounced by the BNB by 16.00, the exchange rate of the previous day was to bedeemed valid.

5. The BNB was to set bid rates of the Euro and the Deutschemark equivalent tothe fixed exchange rate of the lev and offer rates of the Euro and the currencies in-cluded in it equal to the bid rates less 0.5%.

6. For currencies, for which the BNB does not set exchange rates, the Bank recom-mended to refer to the latest reference exchange rate of the respective currencypublished in the Financial Times.

31 December Pursuant to Article 29, para. 2 of the Law on the BNB, the Managing Board of theBNB decided: the official exchange rate of the lev to the Euro to be BGL 1,955.83per one Euro, effective as of 1 January 1999.